Sanchar Bhavan, Ashoka Road

1179/DoT/ISPAI/08

2 April, 2008

The Secretary

Department of Telecommunications

Sanchar Bhavan, Ashoka Road

New Delhi 110 001

Sub: Representation on behalf of ILD/NLD Licensees against Demand of ADC by BSNL on VPN/IP-VPN & DLC Services provided by them under ILD/NLD License

Dear Sir,

This has reference to the demand raised by the BSNL for payment of Access Deficit Charge (ADC) on VPN/IP-VPN and DLC services by the ILD/NLD Licensees. Before putting forth our reasons as to why the demand of ADC by BSNL neither maintainable nor justified, it is necessary to set out certain relevant facts governing the nature of service provided by the ILD/NLD operators.

1.  That prior to November, 2004, the Internet Service Providers provided service of ‘Virtual Private Network’ (VPN) as a part of their licensed operation under the ISP License. However, the Department of Telecommunications by decision dated 10th November, 2004 took a view that the ISP license as issued to the Service Providers did not permit them to provide VPN Services (do we have to say that the license did not permit VPN service, if so their stand to raise demand looks to be justified. Instead can we make out that VPN was not specifically included in the license and for more clarity and on representation by various parties Permission to provide VPN was introduced)( Lets use the later option that VPN services were not considered separate from ISP services earlier) and hence, such Service Provider wishing to provide VPN Services would have to take “ Permission to Provide VPN Services” on payment of one time entry fee of RS 10 Crores. This decision was further changed on 23rd December, 2005 and now VPN services were made free but operators wishing to provide the services had to migrate to ILD/NLD license. Pursuant to the judgment of TDSAT dated 3.5.2005, the Internet Service Providers discontinued VPN service on the ISP license and a large number of them migrated to the Permission regime and thereafter to ILD/NLD licenses.

Similarly, Infrastructure providers in the business of providing pure play domestic bandwidth also migrated to the NLD Regime from IP-II by paying the additional amount of Rs. 2.5 Crores upon the simplification of the NLD License as it was intimated in press note in Nov 2005 that the Govt. has decided to do away with IP-II license and those IP-II licensees not interested in migrating to NLD/ILD shall not be permitted to provide National/International leased line/bandwidth to individual subscribers as per existing IP-II licence guidelines. It is also worth mentioning here that the service provider taking the lease lines from the infrastructure provider pays ADC to BSNL for the traffic that it carries on the network of the infrastructure provider.

2.  For the purpose of present representation, it is important to understand the exact nature of VPN service provided by the ILD/NLD licensees to their customers. VPN i.e. Virtual Private Network is used essentially for High Speed Secure Data Transmission. It is relevant hereto state that although the ILD/NLD License permits the licensee to transmit voice and data, a large number of the licensees only transmit data through VPN Services provided by them. Some of the ISP’s transmit both voice and data under different packages. For the purpose of the present representation, it is expressly stated that VPN service does not include transmission of voice traffic and is restricted to data transmission only. Also the under domestic leased circuit business, the bandwidth services are provided to various customers and there is no carriage of switched voice calls.

3. On 24th January, 2003, the TRAI notified a new Telecom Tariff Order (TTO) and Interconnect Usage Charge (IUC) Regulations. The said IUC Regulations included an Access Deficit Charge (ADC), which was intended to compensate the access deficit that would arise for the basic service providers, where the monthly rental and local call charges did not cover the relevant cost. The objective of ADC when introduced was to rebalance the tariff and to compensate deficit in cost based rental for basic services, free calls and below cost local call charges. The idea behind ADC was to compensate the fixed lines incumbents for rental/local call charges and any other below cost tariff to make the basic telecom service affordable to the common man specially in the rural areas. The framework of interconnect usage charges and ADC regime was established by TRAI through the telecommunication, interconnection usage charges (IUC), Regulation, 2003 (1 of 2003 dated 24.1.2003). The TRAI reviewed the ADC regime by superseding its earlier regulation by the Telecommunication Interconnection Usage Charges Regulation, 2003 dated 29.10.2003, effective from 1.2.2004. The regulations were subsequently amended on 6.1.2005 and lastly on 23rd February, 2006.

4. The relevant observations and understanding of the TRAI with respect to ADC in its Consultation Paper No. 2003/1 dated 15th May 2003 is as below:

“Section 2

Background to the IUC Regulation

1.  In a Multi-Operator environment, it is important to specify an IUC regime which gives greater certainty to the inter-operator settlements and facilitates interconnection agreements. Thus, there was a need for specifying cost based Interconnection Usage Charges (IUC) for origination, transit and termination in the Multi-Operator environment. Origination and Termination usage charges include Access Deficit Charge (ADC) payable to the Basic Service Operators which they must get in order to keep the rentals as well as local calls affordable.

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5.  The Interconnection Usage Charges for Origination, Transit and Termination are also the underlying costs of carrying a call from the calling to the called party and are thus closely linked with determination of retail tariffs.

6.  Framework of IUC regime was already established by TRAI through its Regulation on Reference Interconnect Offer (RIO). As detailed therein, IUC has to be determined based on minutes of usage for various Unbundled Network Elements and the costs of these e elements

7.  The Access Deficit Charge (ADC) as notified by TRAI on 24th January 2003, was derived by comparing the cost based rental and local call charge with an affordable level for rental/local call charges, special concessionary local call charges in the rural areas, provision of free calls, and any other below cost tariffs to make the Basic telecom services affordable to the common man to promote both Universal Service and Universal access as per NTP’99. These tariffs were specified in the Authority’s Tariff Order dated 24th January, 2003. In order to reach the final estimates of IUC, the IUC Regulation had taken into account the requirements of Access Deficit Charge arising out of the Tariff Order. The distribution of ADC on different tariffs streams, was notified by the Authority in its IUC Regulations dated 24.1.2003.

8.  The ADC compensates for the below cost rentals and the free calls provided for Basic Service such as POTS. For other services such as Cellular Mobile and Wireless in Local Loop with limited mobility (WLL-M), the Access Deficit Charge was not applicable as the rentals and call charges in these segments cover costs as these tariffs have been left to market forces and have not been kept below cost by regulation.”

It is relevant to here to state that TRAI understood the application of ADC only for voice calls and not on data transfers, which becomes apparent from the from the manner and nature of tariff fixation, which is entirely based on calls and has no reference to Data.

5. In the Consultation Paper on Access Deficit Review dated 23.6.2004, the TRAI in Chapter 1, “Background” clearly understood that the ADC was recoverable only on calls and not on data transmission. In this connection the following observations are relevant:

“1.3 On 24th January 2003, the Authority had notified an IUC Regulation which specified origination, carriage and termination charges, as well as the access deficit charges. The ADC regime was applicable only for calls involving fixed line subscribers either at one end or both ends. This involved differential IUC/ADC charges for calls from and to fixed line, cellular mobile and WLL(M). The Authority had considered that it would review and address any problems with the regime in light of experience with the regime after implementation.

1.4 The tariffs which were reported by the service providers subsequent to the IUC regime showed certain anomalies and pointed to unsustainability of the regime. The ADC being loaded only on calls involving fixed line meant that the cellular mobile long distance tariffs could be much more attractive than fixed line tariffs incorporating the ADC. To compete in such a situation, however, the fixed line service providers were forced to offer tariffs which did not fully cover the IUC plus ADC, thus facing an unsustainable situation………. ”

The above said intention to impose ADC on voice traffic only is further amply borne out plain reading of Notification dated 6th January 2005.

6. Vide notification dated 23rd February 2006, the TRAI, imposed ADC on ILD/NLD licensees. However, it may be stated that at that point of time VPN was not included in ILD/NLD license, hence the entire revenue of ILD/NLD was on voice. In June 06, in most cursory manner, without differentiating between import and user of Internet Telephony and VPN Services, VPN was merged with ILD/NLD. Further, the fact that under the NLD License, there are players who do not actually carry the voice calls but only provide domestic bandwidth has also been ignored while stipulating the applicability of ADC on NLD Licensees.

7. Given that ADC is a part of and included in IUC, hence, it is necessary to appreciate that meaning and scope of “interconnection usage charge”.

The Telecommunication Interconnection Usage Charges (IUC) Regulation, 2003 was superseded by Notification dated 29th October 2003. The said Notification covers payment of IUC among service providers for Telecommunication Services, covering Basic service, which includes, WLL (M) services, Cellular Mobile Service Providers and Long Distance Operators (STD /ISD) throughout India.

8. The term 'Interconnection Charge' [2 (ix)] is defined separately and Independent of the term 'Interconnection Usage Charge' (IUC) [2 (x)], which is charge payable between service providers for usage of network elements for origination, transit and termination of Calls. Section IV which sets out schedules for IUC specifies only "calls" and is not indicative of any other services such as 'data transmission or domestic bandwidth

The term "Interconnection" is defined to mean commercial and technical arrangements under which service providers connect their equipment, networks and services to enable their customers to have access to the Customers, services and networks of other service provider.

This presupposes existence of connection between two service providers, namely, interconnection provider and interconnection seeker.

9. Although in case of ILD / NLD operators, there is no "Interconnection" because they provide only VPN /IPVPN services through their own 'switch' and do not have interconnection as defined under Regulations, and, as such, are is not liable to pay interconnection usage charges under the Regulation, nevertheless by incorrect understanding of the nature of their services and by linking them with voice telephony, BSNL is recovering ADC from them. This is further confirmed by Table III where applicability of ADC is tabulated, which only mentions various "calls" which does not apply to VPN / IPVPN / Domestic leased lines services at all.

Thus, plain language of the Regulation imposes the liability on ADC on those lLD / NLD operators (i) who entertain voice traffic only or (ii) NLD /ILD operators who provide partly voice traffic along with other non-voice traffic services in which case, the liability could be only to the extent of voice traffic services.

Such ILD/NLD operators who do not offer voice traffic services and merely transmit data are not liable under the Regulations for payment of ADC.

10 It is to be appreciated that TRAI as a regulatory authority has fixed the Access Deficit Charges to paid in respect of services enjoyed by a certain category of the service providers. Given that the TRAI has fixed charges for a service, given that no service whatsoever of interconnection is provided to the ILD/NLD operators while offering VPN/IP-VPN/DLC service, the application of ADC on the same is not maintainable and without the authority of law. Such service providers cannot be compelled to pay ADC to BSNL when there is no service rendered to them by the said Agency.

11. In the circumstances, the demand of ADC by BSNL on the NLD/ILD licensees on VPN/IP-VPN /DLC Services is not maintainable and is required to be withdrawn.

12. Keeping the above in view we request DOT our licensor to take up the issue with TRAI and obtain a exemption for such NLD’s from payment of ADC and assist in obtaining refund of the ADC fees paid under protest due to notice from TRAI.

Thanking you,

Yours truly,

For Internet Service Providers Association of India

Col (Retd.) R.S. Perhar

Secretary