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TMI Blog2022 (3) TMI 1143X X X X Extracts X X X X X X X X Extracts X X X X ..... to his employment - the said service by way of tolerating non-performance or breach of contract for which consideration in the form of liquidated damages is payable to the appellant is neither exempted under Notification nor covered under para 1 of Schedule III of the GST Acts. The appellant M/s. Amneal Pharmaceuticals Private Limited is liable to pay Goods and Services Tax at applicable rate on the amount of notice pay (liquidated damages) received from the employees leaving the job of the appellant without completing the notice period as specified in the contract entered into (Appointment Letter) between the appellant and its employees, and reject the appeal filed by M/s. Amneal Pharmaceuticals Private Limited. Findings as per Milind Torawane: HELD THAT:- Transaction or activity is not in the course and furtherance of business: As stated above, the contract of employment between the employer and an employee, where the employee promises to provide employment services to an employer in return for a consideration (i.e. salary ) is the transaction in the course and furtherance of business. The employee at his own choice decides to serve during the period of notice pay or not to serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cals Pvt. Ltd. filed an application for advance ruling before the Gujarat Authority for Advance Ruling (herein after referred to as the 'GAAR'), wherein it submitted that it enters into contract with the employees at the time of appointing any employee at their factory, by issuing 'Appointment Letter'. One of the conditions mentioned in the 'Appointment Letter' is - "Your services can be terminated by giving three months' notice or notice pay in lieu of notice period from either side.". Thus, as per the said condition, either parties shall serve a three months' notice, and if any employee doesn't serve the notice period after tendering the resignation, then as per the contract (Appointment Letter) condition, company is entitled to recover the notice pay from the agreed portion of salary to compensate the loss to the appellant company. It further submitted that in case the employee resigns and leaves without serving the notice period, the company is deducting the notice pay amount for unserved notice period to cover the loss of company for immediate recruitment of new candidates and also to regularize the activities not handed over to upcoming employee. It was also submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued a relieving letter once the terms of employment agreement (Appointment Letter) are fulfilled, hence it should be covered within the referred entry. 3.3 The appellant has relied upon the decisions in the cases of Nandinho Rebello Vs. Deputy Commissioner of Income Tax [(2017) 80 taxmann.com 297 (Ahmedabad - Trib.)], GE T & D India Limited Vs. Deputy Commissioner of Central Excise, Gujarat State Fertilizers and Chemical Ltd., and HCL Learning System Vs. CCE, Noida. 4. There has been change in one of the two Members of this authority consequent upon the transfer and posting of the Chief Commissioner, Gujarat Goods and Services Tax, after Personal Hearing has been held in this case. The appellant was therefore asked whether they require fresh hearing or not. The appellant vide their mail dated 03.01.2022 informed that by virtue of recent AAAR ruling issued by Madhya Pradesh Appellate Authority for Advance Ruling which held that "GST is not applicable on payment of notice pay by an employee to the applicant in lieu of notice period", they find that their case is similar and no GST should be leviable on recovery of notice pay. They attached the copy of order dated 8.11.2021 passe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other party breaches. If the parties to a contract have agreed on liquidated damages, the sum fixed is the measure of damages for a breach, whether it exceeds or falls short of the actual damages." In the present case, the appellant and the employees have agreed that in case of leaving of job by the employee without giving three months' notice, the amount equivalent to salary of unserved period of notice would be the measure of damages, which the appellant would receive from the employee concerned. The appellant would tolerate the hardship due to employee leaving the job without three months' prior notice in breach of the terms of contract (Appointment Letter) and the appellant would be receiving the amount of 'liquidated damages' for the same. 7.3 As per para 5(e) of Schedule II read with section 7 of the GST Acts, 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act' is treated as supply of service. Therefore, the tolerating, by the appellant, of the act of employee leaving the job without giving three months' notice against the consideration in the form of amount equivalent to salary of unserved notice period, is covered und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e). 8.3 Schedule III of the GST Acts covers various activities or transactions, which shall be treated neither as a supply of goods nor a supply of services. Para 1 of the said Schedule III covers 'services by an employee to the employer in the course of or in relation to his employment'. However, the present case is not covered by the said Para 1 of Schedule III inasmuch as the service of tolerating of the act of breach of the contract is on the part of the employer. Neither the employee is providing the service, nor it is in the course of or in relation to his employment. 8.4 Thus, the said service by way of tolerating non-performance or breach of contract for which consideration in the form of liquidated damages is payable to the appellant is neither exempted under Notification nor covered under para 1 of Schedule III of the GST Acts. 9. The appellant has referred to several case laws. It has been observed that the decisions in the cases of GE T & D India Limited Vs. Deputy Commissioner of Central Excise, Gujarat State Fertilizers and Chemical Ltd., and HCL Learning System Vs. CCE, Noida were rendered in the context of Services Tax (Finance Act, 1994) and therefore are not sq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice period before he/she resigns. But, most of the employee agreements have a clause stating that if an employee wants to leave the company without serving the agreed notice period, then he is required to pay an amount equal to the unserved notice period. This is called notice pay recovery, which is either recovered from the employee or deducted from the salary payable to him. Before finalizing whether tax is leviable on notice pay recovery, we have to decide whether the said transaction constitutes "supply" in terms of section 7 of the CGST Act and whether employer can be termed as "supplier"? 13.2 The term "supplier" is defined in clause (105) of section 2 of the CGST Act, which is reproduced as under: Section 2 (105) :- "supplier" in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied; Thus, in term of above definition, to qualify any person as "supplier", such person should be engaged into supply of goods or services or both. 13.3 Before, determining any person as supplier, the activity or tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract of employment is a contract between the employer and an employee where the employee promises to provide employment services to an employer in return for a consideration i.e. "salary". The essential purpose of the contract is for employment service and not to recover notice pay. Recovery of notice pay arises only as a condition of breach of contract or at time when the contract comes to an end. Therefore, the clause containing the notice pay recovery in the contract of employment does not extend an option to the employee whether or not to perform. It protects the employer in case of early cessation of service by the employee. The term "made or agreed to be made" used in the definition of "supply" suggests a certain degree of voluntary act on part of the service provider. The act of notice pay recovery is only an extinguishment of the obligation of the employee which does not constitute an independent/voluntary act by the employer. Thus, the act of notice pay recovery arises as a condition of breach of contract and is not a contract in itself to qualify as a supply. 13.4.2 Absence of service element: As the activity is not relating to tangible goods, it is required to be as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contract of employment, notice pay recovery does not attain the character of a consideration for the very reason that they are not linked to any voluntary act of the supplier. In the ruling in case of "M/s Bhayana Builders (P) Ltd & Others vs. CST Delhi, & Others", it was emphatically held that the architecture of the law is such that the consideration should always flow from the service recipient to the service provider and should accrue to the benefit of the latter. Applying the same analogy of the ruling and the explanations above, it can be inferred that notice pay recovery neither is a consideration, nor does it flow at the discretion of the service provider. Further, there is no benefit accruing to the employer, moreover he has suffered from the sudden exit of the employee. 13.4.3.4 Damage vs consideration: Damage in its general connotation means money compensation for loss or injury caused by the wrongful act of the other. Notice pay recovery is a damage arising out of breach of the contract of employment which curtails the time period of the employer to find a competent and suitable replacement. It also hampers the smooth administration of the work which was hitherto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de without consideration. Generally, consideration is required for any activity or transaction to be treated as supply. However, the activities specified in Schedule I are to be treated as supply even though made without consideration. 13.4.5.2 The following activity, as specified in Para 2 of schedule I, is treated as supply, even though made without consideration. 2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business: Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both. Now, it is required to be ascertained whether act of notice pay recovery by the employer is included in para 2 of Schedule I or not. 13.4.5.3 As per sub-clause (iii) of clause (a) in the explanation to section 15 of the Act, employer and employee are deemed to be considered as related persons. Therefore, supply of goods or services between employer and employee, when made in the course or furtherance of business, may be considered as supply. 13.4.5.4 In the instant case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, the employer cannot be said to have rendered any service per se as 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. 13.4.7 In case of GE T & D India Limited Versus Deputy Commissioner of C. Ex., Chennai (2020 (35) G.S.T.L. 89 (Mad.)), Hon Madras High Court, in para 12 of the judgement, has made the following remarks on the issue whether the amount received from employee by the employer as notice pay in lieu of sudden termination gives rise to rendition of service either by employer or by employees under section 65 of Finance Act, 1994. 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 non-compete. Notice pay, in lieu of sudden termination however, does not give rise to the rendition of service either by the employer or the employee. 13.4.8 Thus, in view of the foregoing para 13.4.1 to 13.4.7, the act of recovery of an amount by the appellant from the employee, for failure to give prior notice is outside the scope of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r service. Therefore, the transaction of the appellant in the form of notice pay recovery does not fall within the scope of "supply" as provided in section 7 of the GST Acts, and where the activity or transaction does not amount to supply, the amount received by the employer has no relevance for levying tax under the GST Acts. 16. The appellant has submitted the copy of advance ruling in case of M/s. Bharat Oman Refineries Limited issued by the Madhya Pradesh Appellate Authority for Advance Ruling on 8th November, 2021 wherein it was held that GST is not applicable on payment of notice pay by an employee to the applicant-employer in lieu of notice period. Though, as per provision of section 103 (1), ruling is binding only on the concerned applicant and the jurisdictional officer in respect of that applicant, the ratio in the said ruling is in consonance to the findings of the present case. 17. In view of the foregoing, I allow the appeal filed by the appellant M/s. Amneal Pharmaceuticals Private Limited and modify the Advance Ruling No. GUJ/GAAR/R/51/2020 dated 30.07.2020 of the Gujarat Authority for Advance Ruling, by holding that the appellant is not liable to pay Goods and Ser ..... X X X X Extracts X X X X X X X X Extracts X X X X
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