2024 (10) TMI 1544 - AT - Service Tax

Service tax on the bond amounts secured by them from their employees - incident of recovering amount (notice pay from the employees) is covered under category of the declared service - department is of the view that as per Clause (e) of the section 66E of the Finance Act, 1994 this fact is covered by the category of Agreeing to an obligation to refrain from an act, or to tolerate an act or a situation or to do an act. HELD THAT - We have heard both the sides, we find that the issue it hand is no longer res integra as the matter has already been decided by this Tribunal in case of Rajasthan Rajya Vidhyut Prasaran Nigam Limited 2022 (1) TMI 909 - CESTAT NEW DELHI employee who is the service provider and the service provided by him in the course of employment is excluded from the definition of service. Where the employer recovers any amount, the service provider will be the employer and his services are not excluded from the definition of service. Therefore, a distinction needs to be made on this count. On a specific query from the bench, he fairly submits that there are no case laws to support this argument nor is there any case law contrary to the judgment in the GE T D 2019 (12) TMI 1566 - MADRAS HIGH COURT In view of our finding that 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 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.

Summary

Issues Involved:
1. Whether the amounts recovered by the employer from employees as 'notice pay' for resigning without serving the notice period are exigible to Service Tax under Section 66E(e) of the Finance Act, 1994.
2. Interpretation of 'Declared Services' under Section 66E(e) of the Finance Act, 1994.
3. Distinction between 'consideration' and 'compensation' in the context of service tax liability.

Issue-Wise Detailed Analysis:

1. Taxability of Notice Pay as Service Tax:
The primary issue was whether the amounts collected by the appellant from their employees as 'notice pay' for resigning without serving the stipulated notice period should be subjected to Service Tax under Section 66E(e) of the Finance Act, 1994. The department argued that such amounts fall under the category of 'declared service' as they involve the employer agreeing to tolerate an act or situation, which is resigning without notice. The Tribunal, however, referred to its previous decision in the case of Rajasthan Rajya Vidhyut Prasaran Nigam Limited, which clarified that such amounts are not for any service rendered but are compensation for breach of contract terms. Therefore, they do not constitute a 'service' under the Finance Act, 1994, and are not liable for service tax.

2. Interpretation of 'Declared Services':
Under Section 66E(e) of the Finance Act, 1994, 'declared services' include activities where there is an agreement to refrain from an act, tolerate an act or situation, or do an act for consideration. The Tribunal highlighted that for an activity to be considered a 'declared service,' it must be performed for a consideration. The Tribunal emphasized the distinction between consideration, which is the objective of the contract, and compensation, which is a remedy for non-performance. The Tribunal concluded that notice pay does not meet the criteria of consideration as it is not the objective of the employment contract but rather a penalty for not fulfilling the contract terms.

3. Distinction Between Consideration and Compensation:
The Tribunal elaborated on the difference between 'consideration' and 'compensation.' Consideration is something received for the performance of a contract, while compensation is a remedy for breach or non-performance. In the context of employment contracts, notice pay is a form of compensation for the employer's inconvenience due to the employee's premature resignation. The Tribunal, citing various precedents, including the Madras High Court's decision in GE T&D India Ltd., reiterated that compensation paid for breach of contract terms does not constitute consideration for a service and thus falls outside the scope of service tax.

Conclusion:
The Tribunal concluded that the recovery of notice pay by the employer from the employees does not constitute a 'service' under the Finance Act, 1994, as it is not performed for consideration. Consequently, such amounts are not exigible to service tax. The Tribunal set aside the impugned order, allowing the appeal in favor of the appellant. The decision aligns with previous judgments, reinforcing the principle that compensation for breach of contract is not taxable as a service under the relevant provisions of the Finance Act.