Delhi High Court Quashes Service Tax Demand of Rs. 56.61 Crores Against MTNL

The Delhi High Court has quashed the service tax demand of Rs. 56.61 crores against Mahanagar Telephone Nigam Limited (MTNL).

The bench of Justice Vibhu Bakhru and Justice Amit Mahajan has observed that MTNL had received the compensation during the financial year 2015-16, which was prior to May 14, 2016, i.e., the date on which the Finance Act, 2016, came into force and Clause (j) was introduced in Section 66E of the Act. Thus, the surrender of any right to use the spectrum by MTNL prior to the said date would not be chargeable to service tax.

The appellant-assessee, MTNL, is a Government of India enterprise engaged in the business of providing telecom services to subscribers in Delhi and Mumbai. The assessee has challenged the show cause notice dated May 22, 2018 issued by the Additional Director General, Director General of GST Intelligence) calling upon MTNL to show cause why service tax amounting to Rs. 56,61,37,440, inclusive of cess, should not be recovered from it along with interest under Section 73(1). MTNL was also called upon to show cause why a penalty should not be imposed under Sections 76 to 78.

MTNL was allocated CDMA spectrum at 800 MHz for two carriers of 1.25 MHz each in Delhi and Mumbai. The spectrum was being used by MTNL in the licensed areas. The spectrum was licensed until October 9, 2017, but MTNL surrendered it on April 21, 2014. MTNL provided the financial support on a pro rata basis for the unexpired period of three years and 173 days. The amount payable was worked out at the auction rate for the said spectrum. The surrender of the spectrum or the receipt of any value or financial support on account of the unexpired period of the allocation does not amount to any service as understood in common parlance.

The issue raised was whether MTNL is liable to pay service tax on the compensation of Rs. 458.04 crores received by it from the Government of India on the surrender of spectrum—800 MHz CDMA.

MTNL has contended that the show cause notice has been issued beyond the period stipulated under Section 73(1). The extended period of limitation in terms of the proviso to Section 73(1) is unavailable as it has not made any willful misstatement or suppressed any material fact to evade service tax.

MTNL submitted that the show-cause notice had been issued without the mandatory pre-consultation. The compensation received for the surrender of frequency is not a taxable service under Section 66E(e). The transactions regarding assignment to use radio frequency spectrum and subsequent transfers were specifically included as a declared service by the insertion of Clause (j) in Section 66E of the Act by the Finance Act of 2016, with effect from May 14, 2016.

MTNL claimed that the insertion of a specific clause covering the service clearly establishes that it was not a declared service prior to the enactment of the Finance Act, 2016.

The act of transferring radio frequencies now falls within ‘declared service’ by virtue of clause (j) of Section 66E. There would be no reason for the Parliament to amend Section 66E of the Act to specifically include the assignment of the right to use radio frequency spectrum or its transfer as a separate ‘declared service’ if it was covered under Section 66E(e).

The court noted that the assignment by the government of the right to use radio frequency spectrum or its subsequent transfer does not constitute declared service under Clause (e) of Section 66E of the Act. It does so under Clause (j) of Section 66E.

Case Title: Mahanagar Telephone Nigam Ltd. Versus Union Of India

Citation: 2023 LiveLaw (Del) 293

Date: 06.04.2023

Counsel For Petitioner: J.K. Mittal

Counsel For Respondent: Vikas Kumar Sharma

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