2023 (6) TMI 1466 - AT - Service Tax

Levy of service tax - amount retained by the appellant as notice pay recovery - consideration for a declared service under service tax law - amount deducted by the appellant from the unpaid salary of employees who left without serving the notice period - HELD THAT - The show cause notice has very clearly stated that the amount of Rs. 2, 09, 33, 892/- is recorded in the books of account as salary not paid to the employees. The basic fundamental of charging service tax at ad valorem is that the service provider has to receive consideration from the service recipient. Here as per the show cause notice the appellant has not received any consideration and therefore the question of payment of service tax does not arise. The amount which is stated by Revenue in the show cause notice is the amount not paid as salary and retained by the appellant. Salary is out of the purview of service tax. Further this issue is no more res integra and decided through case law relied upon by the appellant. In the final order of this Tribunal in M/S HCL LEARNING LIMITED VERSUS COMMISSIONER OF CENTRAL GOODS SERVICE TAX NOIDA 2019 (12) TMI 558 - CESTAT ALLAHABAD it has been held that such recovery is out of salary and salary is not covered by the provisions of service tax and therefore the demand is not sustainable. Conclusion - Salary deductions for notice period breaches do not constitute consideration for a declared service and are not subject to service tax. As per the show cause notice the appellant has not received any consideration and therefore the question of payment of service tax does not arise. Appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the amount deducted by the appellant from the unpaid salary of employees who left without serving the notice period qualifies as consideration for a declared service under service tax law.
• Whether the amount retained by the appellant as "notice pay recovery" is subject to service tax.
• Whether the precedent decision in the case of HCL Learning Ltd. vs. Commissioner of Central Goods and Service Tax, Noida is applicable to the present case.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether the amount deducted qualifies as consideration for a declared service under service tax law.

• Relevant legal framework and precedents: The legal framework revolves around the definition of "service" and "consideration" under service tax law. The precedent case of HCL Learning Ltd. vs. Commissioner of Central Goods and Service Tax, Noida was referenced.
• Court's interpretation and reasoning: The court noted that for service tax to be applicable, there must be a consideration received by the service provider. In this case, the appellant did not receive any consideration from the employees; instead, they retained a portion of the salary that was not paid.
• Key evidence and findings: The show cause notice and the appellant's books of accounts indicated that the amount in question was recorded as "salary not paid" rather than a separate income or consideration.
• Application of law to facts: The court applied the principle that salary is not subject to service tax, and since the amount retained was part of the salary, it fell outside the purview of service tax.
• Treatment of competing arguments: The appellant argued that the amount was part of unpaid salary, and thus not taxable, while the Revenue treated it as consideration for tolerating the act of leaving employment. The court favored the appellant's interpretation based on legal precedent.
• Conclusions: The court concluded that the deductions did not constitute consideration for a declared service and were not subject to service tax.

Issue 2: Applicability of the precedent decision in HCL Learning Ltd.

• Relevant legal framework and precedents: The precedent case established that amounts recovered as part of salary are not subject to service tax.
• Court's interpretation and reasoning: The court found that the facts of the present case were similar to the HCL Learning case, where it was held that salary-related recoveries are not taxable.
• Key evidence and findings: The court referenced the final order in the HCL Learning case, which supported the appellant's position.
• Application of law to facts: By applying the precedent, the court determined that the appellant's actions were consistent with established legal interpretations.
• Treatment of competing arguments: The Revenue's position was that the precedent was not applicable, but the court disagreed, citing the similarity in circumstances.
• Conclusions: The precedent was applicable, and the demand for service tax was not sustainable.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The basic fundamental of charging service tax at ad valorem is that the service provider has to receive consideration from the service recipient. Here as per the show cause notice, the appellant has not received any consideration and, therefore, the question of payment of service tax does not arise."
• Core principles established: Salary deductions for notice period breaches do not constitute consideration for a declared service and are not subject to service tax.
• Final determinations on each issue: The Tribunal set aside the impugned order and allowed the appeal, determining that the demand for service tax was not justified.

The judgment highlights the importance of distinguishing between salary components and taxable services, reinforcing that not all financial recoveries or deductions qualify as taxable consideration under service tax law. The reliance on established precedent underscores the judiciary's commitment to consistency in legal interpretation.