2024 (11) TMI 473 - AT - Service Tax

Service tax leviability on penalty for not completing the contract within the stipulated time period - Obligation to refrain from an act or to tolerate an act or a situation - Declared Services - Whether the penalty recovered from the contractors for not completing the work/ contract within a stipulated time is liable to service tax as a declared service u/s 66 E (e)? - HELD THAT - As per the plain reading of the above declared service under-sub Clause (e), the activity of not completing the contract within the stipulated time period as provided under contract does not fall under the aforesaid entry. It is a penalty which is imposed on the contractor for not completing the work within the stipulated time period. Therefore, such penalty is not the consideration towards any service. Accordingly, the same does not fall under the declared service as provided u/s 66 E (e) of Finance Act, 1994. This issue is no longer res-integra in the light of the decision cited by the appellant in the case of South Eastren Coalfields Ltd. 2020 (12) TMI 912 - CESTAT NEW DELHI it is clear that penalty towards non fulfillment of the condition of the contract will not fall under Section 66 E (e) of Finance Act, 1994, therefore the service tax under the said declared service cannot be recovered. Accordingly, service tax demand on this ground is set aside. Service tax on consideration recovered from the employees who have not complied with the condition of giving sufficient notice before leaving the job - This issue is also not res-integra as the same has been decided in the case of GE T D INDIA LIMITED 2020 (1) TMI 1096 - MADRAS HIGH COURT the employer cannot be said to have rendered any service per se much less a taxable service and has merely facilitated the exit of the employee upon imposition of a cost upon him for the sudden exit. The definition in clause (e) of Section 66E as extracted above is not attracted to the scenario before me as, in considered view, 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. Though normally, a contract of employment qua an employer and employee has to be read as a whole, there are situations within a contract that constitute rendition of service such as breach of a stipulation of noncompete. Notice pay, in lieu of sudden termination however, does not give rise to the rendition of service either by the employer or the employee. Towards conclusion raises the plea of availability of alternate remedy. However, since the matter involves an interpretation of the statutory provision in the light of undisputed facts available on record, we see no need to relegate the petitioner to statutory appeal. This plea is also rejected. The demand is not sustainable. Accordingly, the impugned order is set aside, appeal is allowed.

Summary

Issues Involved:

1. Whether the penalty recovered from contractors for not completing the work/contract within a stipulated time is liable to service tax as a declared service under Section 66 E (e) of the Finance Act, 1994.
2. Whether the Notice Pay recovered from employees for not complying with the terms of employment, specifically failing to give sufficient advance notice before leaving the job, is liable to service tax under Section 66 E (e) of the Finance Act, 1994.

Issue-wise Detailed Analysis:

1. Penalty Recovered from Contractors:

The primary issue is whether penalties imposed on contractors for not completing work within the stipulated time frame qualify as a "declared service" under Section 66 E (e) of the Finance Act, 1994. The Department argued that such penalties fall under the category of "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act," thereby attracting service tax.

Upon analysis, it was determined that penalties for non-completion of work do not constitute consideration for any service provided. The penalties are not intended as payment for a service but rather as a deterrent against non-compliance with contractual terms. This view aligns with previous judgments, including the South Eastern Coalfields Ltd case, where it was established that penalties or liquidated damages do not constitute consideration for a service. The Tribunal concluded that the imposition of penalties is meant to safeguard the commercial interests of the appellant and does not reflect an intention to provide a service. Therefore, such penalties do not fall under the declared service category of Section 66 E (e), and the demand for service tax on this basis was set aside.

2. Notice Pay Recovered from Employees:

The second issue concerns whether amounts recovered from employees as notice pay for failing to provide sufficient notice before leaving employment are subject to service tax. The Department contended that such payments are for tolerating the act of immediate resignation and thus constitute a declared service under Section 66 E (e).

The Tribunal referred to the judgment of the Madras High Court in the case of GE T&D India Limited, which clarified that payments made by employees in lieu of notice do not constitute a service rendered by the employer. The court emphasized that the employer does not "tolerate" the act of immediate resignation but allows it upon receiving compensation. The notice pay is not for any service rendered but is a contractual obligation to ensure smooth transition and compensation for sudden exits. Consequently, such payments do not fall within the scope of declared services under Section 66 E (e).

In conclusion, both issues were resolved in favor of the appellant, with the Tribunal setting aside the service tax demands. The penalties and notice pay were determined not to be considerations for any service under the Finance Act, 1994, and thus not subject to service tax. The appeal was allowed, and the impugned order was set aside.