Order date – 6 April 2023 

Parties – Mahanagar Telephone Nigam Ltd. Vs Union of India and Ors.

Facts –

• The Petitioner, MAHANAGAR TELECOM NIGAM LTD. (MTNL), was allocated CDMA spectrum in 800 MHz for two carriers of 1.25 MHz each in Delhi and Mumbai.  The said spectrum was being used by MTNL in the licensed areas. The said spectrum was licensed till 09.10.2017 but MTNL had surrendered the same with effect from 21.04.2014. MTNL was 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.
• In 2018, revenue issued a show cause notice to MTNL proposing to raise a demand on account of service tax (inclusive of cess), computed on the amount received by the Petitioner as financial support for surrendering the CDMA spectrum as the value of service.

Issue –

• Whether MTNL is liable to pay service tax on the compensation received from the Government of India for surrendering spectrum?

Order –

• The Court observed that surrendering of spectrum would not in ordinary sense constitute an activity by one person for another. It is difficult to accept that MTNL had agreed to forbade doing any act as is contended on behalf of the respondents; it had merely agreed to surrender allocation of an asset. It did not agree to tolerate an act.
• 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. It would be a stretch to construe this as forbearance of an act or tolerating an act.   
• In view of the above, 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.
• MTNL had received the compensation during the financial year 2015-16, which was prior to 14.05.2016 – 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.
• In view of the above, the impugned show cause notice is set aside. 

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