2022 (1) TMI 909 - AT - Service Tax

Levy of service tax - amounts received or recovered by the employer from its employees for resigning from the service without giving the requisite notice - Declared Service under Section 66E(e) of the Finance Act, 1994 or not - HELD THAT - Evidently, if none of these are the purpose or the essence of the agreement or if there is no consideration for such an agreement, it does not fall within the ambit of Section 66E(e). If the agreement is for something else and if one of the parties fails to perform as per the agreement and pays to the other a compensation as pre-decided in the agreement, it does not fall under Section 66E(e). The present case deals with contracts of employment. Employment contracts are entered into with the expectation that the employer will continue to keep him employed for the period as agreed and that the employee will perform his duties diligently. They are not entered into so that the employer can remove the employer from service or so that the employee can resign and leave the service. However, often, for various reasons the employer may decide to terminate the services of the employee which puts the employee to inconvenience and he has to find another job - If the employer decides to terminate the services without giving the required notice, the employment contract itself provides for a compensation to be paid. Similarly, if the employee resigns without notice, compensation is paid by the employee or recovered from his dues. Both the notice period and the compensation are incorporated in the employment contact itself but these are not the purpose of the contract. Consequently, any compensation paid is not a consideration for the contract. The compensation for failure under a cannot is NOT consideration for service under the contract and also following the law laid down by Madras High Court in GE T D INDIA LIMITED VERSUS DEPUTY COMMISSIONER OF CENTRAL EXCISE, CHENNAI 2019 (12) TMI 1566 - MADRAS HIGH COURT that Notice pay, in lieu of termination, however, does not give rise to the rendition of service either by the employer or the employee, the impugned order upholding confirmation of a demand of service tax on the notice pay received/recovered by the appellant from its employees for premature resignation cannot be sustained and needs to be set aside. The appeal is allowed.

Issues Involved:
1. Whether the amounts received or recovered by the employer from its employees for resigning from the service without giving the requisite notice is exigible to Service Tax as a Declared Service under Section 66E(e) of the Finance Act, 1994.
2. Interpretation of 'Consideration' versus 'Compensation' under the contract.
3. Applicability of Service Tax on liquidated damages or penalties for breach of contract terms.
4. Clarification by CBEC and relevant case laws regarding notice pay and premature termination of employment contracts.

Issue-wise Detailed Analysis:

1. Exigibility of Service Tax on Notice Pay under Section 66E(e):
The core question was whether amounts received or recovered by the employer from employees for resigning without the requisite notice period are subject to Service Tax as a Declared Service under Section 66E(e) of the Finance Act, 1994. The Tribunal examined the definition of 'Service' and 'Declared Service' under Sections 65B(44) and 65B(22) respectively. Section 66E(e) includes activities such as agreeing to the obligation to refrain from an act, tolerate an act or a situation, or to do an act. However, the Tribunal concluded that the amounts received as compensation for premature resignation do not constitute consideration for a service but are penalties for non-performance of the contract.

2. Interpretation of 'Consideration' versus 'Compensation':
The Tribunal clarified the distinction between consideration and compensation. Consideration is something received for performance under the contract, while compensation is received if the other party fails to perform as per the contract. Consideration is the object of the contract, whereas compensation is not. The Tribunal provided several illustrations to distinguish between these terms, emphasizing that compensation is a fallback for frustration of the contract and not a consideration for tolerating a situation.

3. Applicability of Service Tax on Liquidated Damages or Penalties:
The Tribunal addressed the argument of the Revenue that liquidated damages are agreed upon beforehand in the contract and thus constitute a Declared Service. The Tribunal rejected this argument, stating that the essence of the contract is performance, not non-performance. Liquidated damages or penalties for breach of contract terms are not the purpose of the contract but a consequence of its frustration. The Tribunal cited several cases, including M/s. Repco Home Finance Ltd., South Eastern Coalfields Ltd., and MNH Shakti Ltd., where similar demands for Service Tax on compensation were set aside.

4. Clarification by CBEC and Relevant Case Laws:
The Tribunal referred to CBEC’s guidance notes dated 20.06.2012, which clarified that amounts received by an employee from the employer on premature termination of the contract of employment are not chargeable to Service Tax. The High Court of Madras in GE T&D India Ltd. held that notice pay does not give rise to the rendition of service either by the employer or the employee. This view was followed in several other cases, including Intas Pharmaceuticals, State Street Syntel Services Pvt. Ltd., Shri Ram Pistons and Rings Ltd., and HCL Learning Ltd. The Tribunal found no case laws supporting the Revenue's argument that the employer's recovery of notice pay is exigible to Service Tax.

Conclusion:
The Tribunal concluded that compensation for failure under a contract is not consideration for service under the contract. Following the law laid down by the Madras High Court in GE T&D India Ltd., the Tribunal held that notice pay received/recovered by the appellant from its employees for premature resignation does not give rise to the rendition of service and is not subject to Service Tax. Consequently, the impugned order was set aside, and the appeal was allowed.

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