Guest Post: The Supreme Court Rules on the Powers of the CAG

(This is a guest post by Manish)

Earlier this week, Justice Radhakrishnan of the Supreme Court delivered a judgment with far-reaching consequences: In Association of Unified Tele Services Providers v. Union of India (sitting with Vikramajit Sen, J.), he upheld the right of the Comptroller and Auditor General of India (CAG) to audit the books of private telecom companies.

The matter involved two sets of cases that were heard together as they involved similar facts and questions of law. A brief overview of the law and facts (described in greater detail in paragraphs 6-10 of the judgment) is necessary to provide some context. Under the Indian Telegraph Act, 1885, the Department of Telecommunications of the  Government of India (DoT) issues licenses to private companies (referred to in this piece as “telecom service providers” or “TSPs”)  to provide mobile telephony services in the country, for which the telecom service providers pay a license fee to DoT. The license agreement contains a number of terms and conditions that the licensee (the TSP) is subject to. Among these are accounting requirements which are spelt out in Paragraph 22. Of particular interest is clause 22.3(a), which empowers the licensor (i.e. DoT) or the Telecom Regulatory Authority of India (TRAI) to call for or examine any books of accounts of the licensee at any time without assigning any reason therefor, and places an obligation on the licensee to supply these documents. Clause 22.5 and 22.6 respectively empower the DoT to get an audit and a special audit of the licensee’s accounts carried out. We will return to the significance of these clauses later.

In January 2010, TRAI issued a notice to private telecom service providers, directing them to submit books of accounts for inspection by the CAG under Rule 5 of the Telecom Regulatory Authority of India, Service Providers (Maintenance of Books of Accounts and other Documents) Rules, 2002. Rule 5 requires TSPs to produce books of accounts, documents and related statements and information to TRAI for enabling an audit by the CAG under s. 16 of the Comptroller and Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971 (“CAG Act”).

Both the notice as well as Rule 5 were challenged in writ petitions filed by the Association of Unified Tele Services Providers (AUTSP), an industry body comprising various Indian TSPs, as being in violation of section 16 of the  CAG Act and Article 149 of the Constitution of India.

Meanwhile, in a separate context, and in furtherance of the notice issued by TRAI, the DoT in March 2010 issued a notice to the telecom service providers directing them to provide details of their books of accounts for the previous three years to the CAG for audit. Following this, the Director General of Audit, Post and Telecommunication issued another notice in May 2010, requesting the telecom service providers to provide the required information. The telecom service providers challenged these notices before the Telecom Telecom Disputes Settlement and Appellate Tribunal (TDSAT) as being in violation of the terms of the license agreement. The TDSAT allowed the challenge and quashed the notices, holding that under Clause 22.5 of the license agreement, an audit was permissible only if the DoT were to form an opinion that the accounts submitted by the service providers were inaccurate and misleading, which was not done in the instant case. The DoT filed appeals before the Supreme Court, which were clubbed with the writ petitions filed by AUTSP and heard together.

The Supreme Court dismissed the writ petitions and allowed the appeals, grounding its reasoning in the powers of the CAG under the Constitution. In order to appreciate the reasoning of the Court, a brief overview of these powers is in order (discussed in paras 33-36 of the judgment). The office of the Comptroller and Auditor General of India derives its power from a relatively lesser-known provision of the Constitution – Article 149, the relevant portion of which reads as follows:


The Comptroller and Auditor General shall perform such duties and exercise such powers in relation to the accounts of the Union and of the States and of any other authority or body as may be prescribed by or under any law made by Parliament (…)” [emphasis supplied]


In furtherance of this Article, Parliament in 1971 enacted the CAG Act, which outlines the CAG’s powers, functions and the procedure for the exercise thereof in detail. Section 16 of the CAG Act specifically deals with the CAG’s functions in relation to the Consolidated Fund of India (CFI):


It shall be the duty of the Comptroller and Auditor-General to audit all receipts which are payable into the Consolidated Fund of India and of each State and of each Union territory having a Legislative Assembly and to satisfy himself that the rules and procedures in that behalf are designed to secure an effective check on the assessment, collection and proper allocation of revenue and are being duly observed and to make for this purpose such examination of the accounts as he thinks fit and report thereon.


One of the objections raised by AUTSP was regarding the scope of the CAG’s powers under Article 149. It was strenuously argued that the words “any other authority or body” had to be read ejusdem generis with the preceding words “of the Union and of the States”, and could therefore only be intended to cover Government authorities or bodies, thus excluding private companies from the scope of the CAG’s audits (much like, for instance, in the case of Article 12, where the term “other authorities”, in the context of fundamental rights obligations, has been read narrowly to cover only State-like entities). In a great example of judicial craftsmanship, Radhakrishnan, J. uses Article 266 of the Constitution to reject AUTSP’s argument, holding that the license fees paid by the telecom service providers would accrue to the CFI and thus be amenable to audit by the CAG under Article 149:


Article 266 says, all the public moneys received by or on behalf of the Government of India shall be credited to CFI. CAG can carry out examination into the economy, efficacy and effectiveness with which the Union of India has used its resources, and whether it has realized the entire licencee fee, spectrum charges and also whether the Union of India has correctly carried out the audit under Clauses 22.5 and 22.6 of UAS Licence Agreement. CAG’s examination of the accounts of the Service Providers in a Revenue Sharing Contract is extremely important to ascertain whether there is an unlawful gain to the Service Provider and an unlawful loss to the Union of India, because the revenue generated out of that has to be credited to the Consolidated Fund of India.”         (para 41)


Having thus firmly established the CAG’s competence to audit private firms in cases involving revenue-sharing arrangements with the Government, the Court then easily dismisses the challenge to the TRAI notice and Rule 5, holding them to be in consonance with the CAG Act and Article 149:


Rule 5 obliges every service provider to produce all such books of accounts or documents referred to in sub-rule (1) of Rule 3 so that the CAG can carry out audit entrusted to it by virtue of the powers conferred under Article 149 read with Section 16 of Act of 1971. Rule 5 only manifests conferment of powers upon CAG in relation to the accounts of bodies in the nature of private service providers which we have already found is consistent with Article 149 of the Constitution.”          (para 49)


The Court then proceeds to set aside the order of the TDSAT, which it holds was incorrectly premised on the assumption that the CAG audit was being carried out in furtherance of Clause 22.5 of the license agreement. It holds that the impugned notices were in fact issued in furtherance of the power in Clause 22.3 of the license agreement, which did not require the DoT to form any opinion or assign any reasons, and were hence not bad in law. The net effect is that the telecom service providers are now required to comply with the notices issued by TRAI and DoT and hand over their books of account to the CAG for inspection.

The implications of the judgment are significant. Every project or service carried out under public-private partnership, involving a revenue sharing model, will now be  subject to a CAG audit. There have been previous examples of CAG audits and inspections of private companies’ books accounts: most prominent from recent memory are the power distribution companies in Delhi and Reliance Industries’ Krishna-Godavari basin gas exploration, but these were carried out in a haze of legality with the threat of litigation looming large. With this authoritative pronouncement, the Supreme Court has cleared the way for large-scale audits of such projects.

More interesting is the subtle, but significant, shift of the power balance in the Constitutional administrative machinery that the Supreme Court has advanced through this judgment. In para 34, Radhakrishnan, J. declares the CAG’s powers under the Constitution to be a part of its basic structure, thereby preventing the Government from taking away these powers by legislation or Constitutional amendment:


Duties and powers conferred by the Constitution on the CAG under Article 149 cannot be taken away by the Parliament, being the basic structure of our Constitution (…)”


The Supreme Court seems to be implying doubts about Parliament’s ability to carry out effective and corruption-free governance, continuing its trend from recent years where it has taken the initiative to oversee investigations into scams and clean up electoral politics, simultaneously been pushing for a greater role for Constitutional authorities like the Election Commission and the CAG. The thread of good governance and public trust runs clearly through the judgment. Right at the beginning (para 3) Radhakrishnan, J. quotes from the 2G judgment and the Presidential Reference on allocation of spectrum:


We have to examine the above-mentioned issue in the light of the various constitutional, statutory and licensing provisions, bearing in mind the fact that we are dealing with “spectrum”, which is universally treated as a scarce finite and renewable natural resource, the intrinsic utility of that natural resource has been elaborately considered by this Court in Centre for Public Interest Litigation and others v. Union of India (…) and in (…) Natural Resources Allocation, in Re: Special Reference No.1 of 2012 (…). This Court reiterated that the spectrum as a natural resource belongs to the people, though State legally owns it on behalf of its people because State benefits immensely from its value.


The Court returns to the theme of the State as custodian, whether of natural resources or public funds, at several points in the judgment. However, by empowering itself and other Constitutional authorities to be keepers of the public trust, the Supreme Court is shifting the delicate balance of power that exists between different institutions of government. Whether this will ensure better governance in the longer run, only time will tell.

(Manish is a legal researcher based in Delhi. The views expressed are his own.)


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Filed under Article 149 - CAG, Miscellaneous

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