2020 (3) TMI 844 - AT - Service Tax

Levy of Service Tax - amount which employer recovers out of the salary paid to the employee if the employee breaches the contract of total term of employment - HELD THAT - The term of contract between the appellant and his employee are that employee shall be paid salary and the term of employment is a fixed term and if the employee leaves the job before the term is over then certain amount already paid as salary is recovered by the appellant from his employee. This part of the recovery is treated by Revenue as consideration for charging service tax. The said recovery is out of the salary already paid and we also note that salary is not covered by the provisions of service tax - Appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Whether the recovery made by the employer from the employee for breaching the employment contract is subject to service tax.

Analysis:
The judgment by the Appellate Tribunal CESTAT ALLAHABAD, delivered by Hon'ble Smt. Archana Wadhwa and Hon'ble Mr. Anil G. Shakkwar, addressed the issue of service tax implications on the recovery made by an employer from an employee for breaching the employment contract. The case involved a situation where the employer had served a show cause notice demanding service tax on the amount recovered from the employee if the employee left the job before the fixed term of employment was completed. The Tribunal noted that the contract between the appellant and the employee stipulated that if the employee left before the term ended, a certain amount of the salary already paid would be recovered by the employer. The Revenue considered this recovery as consideration for charging service tax.

Upon examination, the Tribunal held that the recovery made by the employer was from the salary already paid to the employee. It was emphasized that salary itself is not covered by the provisions of service tax. In support of this conclusion, the Tribunal referred to a decision by the Hon'ble Madras High Court in the case of GE T & D India Ltd. vs. Deputy Commissioner of Central Excise. The Madras High Court's ruling in this case had already established the principle that salary is not subject to service tax. Therefore, based on this reasoning and precedent, the Tribunal set aside the impugned order and allowed the appeal in favor of the appellant.

This judgment provides clarity on the treatment of recoveries made by employers from employees in cases of contract breaches concerning employment terms. It underscores the distinction between salary payments and service tax implications, aligning with established legal interpretations and precedents to resolve the issue at hand.