Delhi High Court: The Division Bench of Vibhu Bakhru* and Amit Mahajan, JJ. after noting that MTNL had received compensation for surrendering spectrum right during 2015-16, which was prior to 14-5-2016, that is, the date on which the Finance Act, 2016, came into force and Section 66-E(j) of the said Act was introduced, held that surrendering of spectrum right by MTNL prior to the said date would not be chargeable to service tax. The Court further opined that no intent to evade tax could be inferred by non-disclosure of the receipt in the service tax return by MTNL and as the impugned show cause notice was issued beyond the period of limitation, it was liable to be set aside.
Background
Mahanagar Telecom Nigam Ltd. (“MTNL”) was incorporated to provide telecommunication services and was granted license by the Department of Telecommunication (“DoT”) in 1986 for an annual payment of Rs. 101. In 1997, the Ministry of Telecommunication amended the conditions of the license granted to MTNL and enabled it to provide Cellular Mobile Services. In 2014, the DoT informed MTNL that the Telecom Regulatory Authority of India (“TRAI”) had recommended that the DoT should withdraw MTNL’s entire spectrum holding in 800 MHz band. Further, MTNL stated that the spectrum was allotted till 2017 and the said period had not expired. MTNL also stated that the spectrum was used for carrying CDMA services and it had made significant capital investment for providing such services and therefore, if the allocated spectrum was prematurely surrendered, then it must be compensated with an amount equal to the value of the spectrum for the remaining period of the license at a value determined at the auction rate of 800 MHz.
In 2015, the DoT issued a letter stating that the Union Cabinet had approved financial support to MTNL in lieu of surrender of the 800 MHz CDMA carriers and thus, Rs. 458 crores were approved to be given to MTNL. Directorate General of Central Excise Intelligence (“DG”), Respondent 2 issued summons under Section 14 of the Central Excise Act, 1944 r/w Section 83 of the Finance Act, 1994 (“Act”), to the officers of MTNL with respect to an ‘enquiry case’ regarding evasion of service tax. Later, the DG sent a letter to MTNL stating that MTNL was liable to pay service tax for providing taxable service by way of surrender of spectrum rights to the DoT and seeking a time limit within which MTNL would discharge its service tax liability.
In 2018, Director General of GST Intelligence, Respondent 3 issued a show cause notice to MTNL by invoking the extended period of limitation provided under Section 73 of the Act r/w Section 174 of the CGST Act, 2017 proposing to raise a demand of around Rs. 56 crores on account of service tax. This demand was computed on the amount received by MTNL as financial support for surrendering the CDMA spectrum, as the value of service.
Analysis, Law, and Decision
The two issues for consideration before this Court were:
a. Whether the allegation that MTNL had suppressed material facts for evading its tax liability, was sustainable?
The Court noted that the impugned show cause notice was issued in 2018, which was admittedly beyond one year from the relevant date defined in Section 73 of the Act. The Court further noted that as per the respondents, the extended period of limitation under the proviso to Section 73(1) of the Act was applicable as MTNL had suppressed material facts from the Service Tax Department regarding surrender of spectrum as a taxable service, and the receipt of consideration.
The Court observed that under Section 73(1) of the Act, the extended period of limitation was applicable only in cases where “service tax had not been levied or paid or had been short-levied or short-paid or erroneously refunded by reason of fraud, or collusion, or willful misstatement, or suppression of facts, or contravention of any provisions of the Act or the Rules made thereunder with an intent to evade payment of service tax”. However, the Court noted that the impugned show cause notice did not contain any allegation of fraud, collusion, or willful misstatement on the part of MTNL.
The Court noted that since it was MTNL’s understanding that the compensation received was not a consideration for any taxable service but for the surrender of spectrum, MTNL could not be expected to disclose the compensation as consideration for service in its Service Tax Returns. The Court therefore opined that there was no requirement for MTNL to do so. The Court further noted that the impugned show cause notice disclosed that the respondents had faulted MTNL for not approaching the service tax authorities for clarification. On this, the Court opined that there was no provision in the Act which contemplated any procedure for seeking clarification from jurisdictional service tax authority and therefore, the reasoning that MTNL ought to have approached the service tax authority for clarification, was fallacious.
The Court further noted that MTNL had declared the receipt of compensation as income in its books of accounts and the final accounts of MTNL were in public domain. Therefore, the Court opined that the allegation that MTNL had suppressed material facts from the Service Tax Department was without any basis. The Court further opined that “mere non-disclosure of a receipt, which a party believed was not chargeable to service tax, in the service tax returns, would not constitute suppression of facts within the proviso to Section 73(1) of the Act, unless it was, ex facie, clear that the receipt was on account of taxable services or it was unreasonable for any assessee to believe that the receipt did not fell in the net of service tax”.
The Court relied on Uniworth Textiles Ltd. v. Commissioner of Central Excise, Jaipur, (2013) 9 SCC 753, wherein the Supreme Court referred to its earlier decision in Cosmic Dye Chemical v. Collector of Central Excise, Bombay, (1995) 6 SCC 117 and explained that “non-declaration would not establish any willful withholding of information if the assessee was in a bona fide belief that the item not disclosed did not attract tax”. The Court opined that “as the intention to invade tax was absent in the present case, which might be evident from material on record or from the conduct of an assessee, therefore, the extended period of limitation under the proviso to Section 73(1) of the Act was not applicable”.
The Court opined that no intent to evade tax could be inferred by non-disclosure of the receipt in the service tax return and as the impugned show cause notice was issued beyond the period of limitation, thus, it was liable to be set aside.
b. Whether the amount received by MTNL would be chargeable to service tax as a receipt for a declared service under Section 66-E(e) of the Act?”.
The Court noted that as per Section 65-B(44) of the Act, to constitute a ‘service’, the same must involve an activity carried out by one person for another and the same should be for a consideration and the term ‘service’ included a ‘declared service’. The Court further noted that the term ‘declared service’ was defined under Section 65-B(22) of the Act which meant “means any activity carried out by a person for another person for consideration and declared as such under Section 66-E”. Further Section 66-E(e) of the Act defined ‘declared services’ and included “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” in its definition.
The Court opined that it was difficult to accept that MTNL had agreed to forbade doing any act but instead MTNL had merely agreed to surrender allocation of an asset and it did not agree to tolerate an act. The Court further opined that “since MTNL had made investments for rendering services using the allocated spectrum, the Government of India had decided to provide financial support on MTNL vacating the spectrum and therefore, it would be a stretch to construe this as forbearance of an act or tolerating an act”. The Court also referred to Section 66-E(j) of the Act which specifically declared that “the assignment of the right to use radio frequency or subsequent transfer” would be constituted as a ‘declared service’.
The Court observed that the act of transferring radio frequencies now falls within ‘declared service’ by virtue of Section 66-E(j) of the Act and there would be no reason for the Parliament to amend Section 66-E 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 the same was covered under Section 66-E(e) of the Act. The Court thus, held that the assignment by the Government of the right to use radio frequency spectrum or its subsequent transfer did not constitute ‘declared service’ under Section 66-E(e) of the Act but instead constituted ‘declared service’ under Section 66-E(j) of the Act.
The Court noted that MTNL received compensation during the year 2015-16, which was prior to 14-5-2016, the date on which the Act, 2016 came into force and Section 66-E(j) of the Act was introduced. Thus, the Court opined that the surrender of any right to use the spectrum by MTNL prior to the said date would not be chargeable to service tax. Thus, the Court set aside the impugned show cause notice.
[Mahanagar Telephone Nigam Ltd. v. Union of India, 2023 SCC OnLine Del 1967, decided on 6-4-2023]
Advocates who appeared in this case:
For the Petitioner: Advocate J.K. Mittal;
Advocate Vandana Mittal;
Advocate Aashna Suri;
For the Respondents: Senior Panel Counsel Vikas Kumar Sharma;
SSC Harpreet Singh;
Advocate Piyush Mishra;
Advocate Suhani Mathur.
*Judgment authored by: Justice Vibhu Bakhru