2023 (4) TMI 216 - HC - Service Tax

Notice Void for Being Time-Barred; Spectrum Surrender Compensation Non-Taxable Before 2016 Amendment.

Mahanagar Telephone Nigam Ltd. Versus Union Of India And Ors.

The SCN issued to MTNL was set aside due to being time-barred, as it was issued beyond the permissible period under Section 73(1) of the Finance Act, ... Levy of service tax - right to use radio frequency - declared service or not - Whether MTNL is liable to pay service tax on the compensation of ₹458.04 crores received by it from the Government of India on surrender of spectrum – 800 MHz CDMA? - SCN issued beyond the period stipulated under Section 73(1) of the Act or not - HELD THAT:- The impugned show cause notice does not disclose any material that could suggest that MTNL had knowingly and with a deliberate intent to evade the service tax, which it was aware would be leviable, suppressed the fact of receipt of consideration for rendering any taxable service. On the contrary, the statements of the officials of MTNL, relied upon by the respondents, clearly indicate that they were under the belief that the receipt of compensation/financial support from the Government of India was not taxable. Absent any intention to evade tax, which may be evident from any material on record or from the conduct of an assessee, the extended period of limitation under the proviso to Section 73(1) of the Act is not applicable. The facts of the present case indicate that MTNL had made the receipt of compensation public by reflecting it in its final accounts as income - merely because MTNL had not declared the receipt of compensation as payment for taxable service does not establish that it had willfully suppressed any material fact. MTNL’s contention that the receipt is not taxable under the Act is a substantial one. No intent to evade tax can be inferred by non-disclosure of the receipt in the service tax return. Undisputedly, the act of transferring radio frequencies now falls within ‘declared service’ by virtue of clause (j) of Section 66E of the Act. 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 the same was covered under Section 66E(e) of the Act - 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 of the Act. However, no service tax on such services prior to 14.05.2016 - Petition disposed off. Issues Involved:1. Legality and jurisdiction of the show cause notice dated 22.05.2018.2. Validity of Rule 3 of the Service Tax Rules, 1994.3. Whether the compensation received for surrender of spectrum is taxable under Section 66E(e) of the Finance Act, 1994.4. Jurisdiction of the Additional Director General, Director General of GST Intelligence in issuing the show cause notice.Summary:1. Legality and Jurisdiction of the Show Cause NoticeThe primary issue was whether the show cause notice issued to MTNL was beyond the period stipulated under Section 73(1) of the Finance Act, 1994. The Court noted that the notice was issued beyond the one-year limitation period and the extended period of five years under the proviso to Section 73(1) could only be invoked in cases of fraud, collusion, willful misstatement, or suppression of facts with intent to evade tax. The Court found no material evidence to support the allegation that MTNL had suppressed material facts with an intent to evade tax. The officials of MTNL had stated that they believed the compensation received was not taxable, and this belief was not unreasonable. Therefore, the extended period of limitation was not applicable, and the show cause notice was set aside.2. Validity of Rule 3 of the Service Tax Rules, 1994MTNL challenged Rule 3 of the Service Tax Rules, 1994, which empowers the Central Board of Excise and Customs to appoint officers for exercising powers under the Act. However, the Court did not find it necessary to address this issue in detail as the primary issue of the show cause notice being time-barred was decided in MTNL's favor.3. Taxability of Compensation for Surrender of SpectrumThe Court examined whether the compensation received by MTNL for surrendering the spectrum constituted a taxable service under Section 66E(e) of the Act. The respondents argued that the act of surrendering the spectrum was a 'declared service' under Section 66E(e), which includes 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act.' However, the Court found that surrendering the spectrum did not constitute an activity carried out by MTNL for another person for consideration. The Court also noted that the specific inclusion of the assignment of the right to use radio frequency spectrum as a declared service under Clause (j) of Section 66E, introduced by the Finance Act, 2016, indicated that such transactions were not covered under Clause (e) prior to this amendment. Therefore, the compensation received by MTNL before the amendment was not taxable.4. Jurisdiction of the Additional Director General, Director General of GST IntelligenceMTNL also challenged the jurisdiction of the Additional Director General, Director General of GST Intelligence, in issuing the show cause notice. The Court did not find it necessary to address this issue separately, given that the show cause notice was set aside on the grounds of being time-barred and the compensation not being taxable.Conclusion:The Court concluded that the show cause notice issued to MTNL was beyond the period of limitation and set it aside. The compensation received by MTNL for surrendering the spectrum was not taxable under Section 66E(e) of the Finance Act, 1994, prior to the amendment introduced by the Finance Act, 2016. The petition was disposed of in these terms.