2019 (12) TMI 1566 - HC - Service Tax

Maintainability of petition - availability of alternative remedy of appeal - Classification of services - Demand of service tax on Notice pay - facilitation of termination of employment or not - HELD THAT - Petition allowed by placing reliance in the case of GE T D INDIA LIMITED (FORMERLY ALSTOM T D INDIA LIMITED) VERSUS DEPUTY COMMISSIONER OF CENTRAL EXCISE 2020 (1) TMI 1096 - MADRAS HIGH COURT where it was held that Though normally, a contract of employment qua an employer and employee has to be read as a whole, there are situations within a contract that constitute rendition of service such as breach of a stipulation of noncompete. Notice pay, in lieu of sudden termination however, does not give rise to the rendition of service either by the employer or the employee. Petition closed.

Summary

Issues:
Interpretation of service tax liability on amounts received in lieu of notice period by outgoing employees.

Analysis:
The judgment dealt with the issue of service tax liability on amounts received by a company from outgoing employees in lieu of notice period. The Assessing Officer contended that such amounts would attract service tax under the category of 'facilitation of termination of employment.' The petitioner challenged this contention through writ petitions after seven show cause notices were issued. The court examined the definition of 'service' under Section 65(44) of the Finance Act, 1994, which excludes services provided by an employee to the employer in the course of employment. The Revenue argued that the arrangement of payment in lieu of notice falls under Section 66E(e) of declared services, constituting taxable service.

The court referred to CBEC's Guidance Notes, which clarified that amounts paid by an employer to an employee for premature termination of employment are not chargeable to service tax as they are not related to the rendition of service. The court agreed with this interpretation, stating that the employer did not render any taxable service but merely facilitated the employee's exit upon being compensated. The court distinguished between situations like breach of non-compete stipulations constituting service and notice pay for sudden termination, which does not amount to service.

The court rejected the argument of availability of an alternate remedy, emphasizing that the matter involved an interpretation of statutory provisions based on undisputed facts. The court concluded that the writ petitions are allowed, and connected miscellaneous petitions are closed without imposing any costs. The judgment provides clarity on the non-taxability of amounts received in lieu of notice period in the context of service tax liability, aligning with CBEC's guidance and statutory provisions.