2022 (5) TMI 427 - AT - Service Tax

Levy of service tax - consideration received on account of notice pay from the employees - declared service or not - appellants herein had collected certain amount as Notice Period Pay or Bond Enforcement Amount from their employees, who want to quit the job without notice - HELD THAT - The term notice pay mentioned in the employment contract cannot be considered as a service, more specifically as the taxable service inasmuch as neither of the parties to the contract have provided any service to each other. Thus, the phrase service defined in Section 65B (44) ibid and declared service , as defined in Section 65B (22) are not applicable for consideration of such activity as a service for the purpose of levy of service tax. Further, the amount received as compensation by the appellants cannot be equated with the term consideration inasmuch as the latter is received for performance under the contract; whereas, the former is received, if the other party fails to perform as per the contractual norms. The Hon ble Madras High Court 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 has held that in absence of rendition of any taxable service, the amount received as consideration cannot be termed as taxable service for the purpose of levy of service tax thereon. It is also found that by relying upon the above judgment of Hon ble Madras High Court, this Tribunal in the case of C.S.T. -SERVICE TAX AHMEDABAD VERSUS INTAS PHARMACEUTICALS 2021 (6) TMI 906 - CESTAT AHMEDABAD and M/S RAJASTHAN RAJYA VIDHYUT PRASARAN NIGAM LTD. VERSUS COMMISSIONER OF CENTRAL GOODS AND SERVICES TAX, CUSTOMS AND CENTRAL EXCISE, JODHPUR I 2022 (1) TMI 909 - CESTAT NEW DELHI has held that any compensation paid by the employee to the employer for resigning from the service without giving the requisite notice, would not be termed as consideration for the contract of employment and as such, would not fall within the preview of taxable service. There are no merits in the impugned order, insofar as it has upheld confirmation of adjudged demands on the appellants - appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
Interpretation of service tax liability on notice pay collected from employees.

Analysis:
1. Facts of the Case: The appellants collected "Notice Period Pay" or "Bond Enforcement Amount" from employees who quit without notice or failed to serve the organization for the prescribed period. The Department alleged non-payment of service tax on this amount, initiating show-cause proceedings leading to a demand of Rs. 6,21,514/- and Rs. 3,42,561/- with penalties.

2. Appellants' Argument: The consultant argued that since no taxable service was provided to employees, recovery of notice pay shouldn't attract service tax under Section 66E(e). They contended that notice pay compensates for non-performance, not a consideration under the statute, citing relevant judgments.

3. Revenue's Position: The Revenue supported the findings in the impugned order, maintaining their stance on service tax liability for notice pay.

4. Tribunal's Analysis: The Tribunal examined the term "notice pay" in the employment contract, concluding it doesn't constitute a taxable service as no service was provided by either party. The compensation received cannot be equated to consideration, as it's for non-performance. Relying on precedents like GE T & D India Limited, the Tribunal held that in the absence of taxable service, notice pay isn't subject to service tax.

5. Precedents: The Tribunal referenced judgments like GE T & D India Limited, Intas Pharmaceuticals, and Rajasthan Vidhyut Prasaran Nigam Ltd., which established that compensation for resigning without notice doesn't fall under taxable service, supporting the appellants' position.

6. Decision: Based on the settled legal position, the Tribunal overturned the impugned orders, finding no merit in confirming the demands against the appellants. Consequently, the appeals were allowed in favor of the appellants.

This detailed analysis of the judgment highlights the key arguments, legal interpretations, precedents, and the final decision regarding the service tax liability on notice pay collected from employees.