2020 (1) TMI 1096 - HC - Service Tax

Classification of services - Demand of service tax on Notice pay - facilitation of termination of employment or not - petitioner is deemed to have facilitated the termination of employment - obligation to refrain from an Act or to tolerate an Act or a situation, or to do not act - HELD THAT - The query raised relates to a contra situation, one, where amounts have been received by an employee from the employer by reason of premature termination of contract of employment, and the taxability thereof. The Board has answered in the negative, pointing out that such amounts would not be related to the rendition of service. Equally, the employer cannot be said to have rendered any service per se much less a taxable service and has merely facilitated the exit of the employee upon imposition of a cost upon him for the sudden exit. The definition in clause (e) of Section 66E is not attracted as the employer has not 'tolerated' any act of the employee but has permitted a sudden exit upon being compensated by the employee in this regard. 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 allowed.

Summary

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

Analysis:
The petitioner, a service tax-assessed dealer, had a provision in employment terms requiring a notice period before quitting, with an option for employees to pay in lieu of notice. The Assessing Officer considered these payments as attracting service tax under a category of service termed 'facilitation of termination of employment.' Seven show cause notices were issued, leading to confirmed assessment orders challenged in writ petitions.

Service tax is levied on activities for consideration, excluding certain transactions like employee services to the employer. The Revenue argued that payments in lieu of notice fall under Section 66E(e) as an agreement to refrain from an act, constituting a taxable service. However, the CBEC's Guidance Notes clarified that amounts for premature termination of employment are not taxable as they relate to services provided by the employee, not the employer.

The court analyzed Section 66E(e) and the CBEC's guidance, concluding that payments in lieu of notice do not constitute a taxable service. The employer did not render a service but permitted sudden exits upon compensation from the employees. While breach of noncompete stipulations in employment contracts may constitute a service, notice pay for sudden termination does not. The court rejected the Revenue's argument and upheld that the employer did not 'tolerate' any act but allowed sudden exits with compensation.

The court dismissed the plea for an alternate remedy, stating that the matter involved interpreting statutory provisions based on undisputed facts, negating the need for a statutory appeal. Consequently, the writ petitions were allowed, and connected miscellaneous petitions were closed without costs.