2024 (5) TMI 368 - AT - Service Tax

Levy of service tax - notice period recovery - Declared Service or not - Department was of the opinion that the said amount is towards agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act - HELD THAT - The employer cannot be said to have rendered any service per se much less taxable service and has merely facilitated the exit of the employee upon imposition of cost upon him for the sudden exit. Definition in clause (e) of Section 66E is not attracted to the scenario at hand. 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 in form of Notice pay, in lieu of sudden termination. In any case this act however, does not give rise to the rendition of service either by the employer or employee. The decision relied upon by the appellant the Principal Bench in 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 is perused wherein it has been held '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 (FORMERLY ALSTOM T D INDIA LIMITED) VERSUS DEPUTY COMMISSIONER OF CENTRAL EXCISE 2020 (1) TMI 1096 - 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 amount from employee received by appellant, the employer, in lieu of notice period is wrongly held to be an amount towards rendering the Declared Service - the order under challenge is hereby set aside - Appeal allowed.

Summary

Issues involved:
The issues involved in the judgment include the non-payment of Service Tax on a notice period recovery, demand of Service Tax under reverse charge mechanism on Renting of Immovable Property Service, and the interpretation of Section 66E(e) of the Finance Act, 1994.

Issue 1: Service Tax on Notice Period Recovery
The Department alleged that the appellant did not pay Service Tax on a notice period recovery amount received from an employee for giving up the job without prior notice. The Department contended that this amount falls under the category of 'Declared Service' u/s 66E(e) of the Act. The demand for Service Tax on this amount was confirmed by the Commissioner (Appeals), leading to the appeal. The Tribunal held that the employer did not render any service but facilitated the employee's exit by imposing a cost for sudden termination. It was concluded that the amount received in lieu of notice period does not attract Section 66E(e) and is not liable for Service Tax.

Issue 2: Demand of Service Tax under Reverse Charge Mechanism
Initially, the proposal included the recovery of Service Tax under reverse charge mechanism on Renting of Immovable Property Service. However, the Commissioner (Appeals) dropped this demand in the appeal. The Tribunal did not delve deeper into this issue as the demand was already dropped by the Commissioner (Appeals).

Interpretation of Section 66E(e) of the Finance Act, 1994
The Tribunal analyzed Section 66E(e) which defines 'Declared Services' to include agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. The Revenue argued that the notice period amount constitutes payment for an obligation to tolerate an act or situation. However, the Tribunal referred to previous decisions and CBEC guidance notes to conclude that the employer did not render any service but allowed the employee's sudden exit upon compensation. It was held that the employer did not 'tolerate' any act of the employee, and the amount received in lieu of notice period does not give rise to the rendition of service, thus not attracting Section 66E(e).

In conclusion, the Tribunal set aside the Order-in-Original confirming the demand of Service Tax on the notice period recovery amount, as it was wrongly held to be towards rendering the Declared Service. The appeal was allowed in favor of the appellant.