The Bangalore Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) consisting of S.K. Mohanty (Judicial Member) and P.Anjani Kumar (Technical Member) has held that any compensation paid by the employee to the employer for resigning from the service without giving the requisite notice, would not be termed as consideration for the contract of employment and would not fall within the preview of taxable service.
The appellants/assessee collected an amount as 'Notice Period Pay' or 'Bond Enforcement Amount 'from their employees who wanted to quit the job without notice or did not serve the organisation for the prescribed period as per terms of the employment contract. During the course of an audit of records maintained by the appellants, it was observed by the Department that the appellants did not pay service tax on the consideration received on account of 'notice pay' from the employees.
The Department determined that the appellant's activity falls under the definition of declared service, as defined in Section 66E(e) of the Finance Act of 1994 Accordingly, show-cause proceedings were initiated against the appellants, which culminated in the adjudication order in which the service tax demands were confirmed along with interest and penalty.
On appeal against the adjudication order, the Commissioner (Appeals) has upheld the adjudication orders and rejected the appeals filed by the appellants. Feeling aggrieved with the impugned orders, the appellants have preferred these appeals before the Tribunal.
The appellants contended that, in the absence of any taxable service provided by the appellants to their employees, the mere recovery of notice pay from the latter will not be subject to service tax levy under Section 66E. The notice pay recovered from the employees was towards the compensation for non-performance according to the desired level and cannot be equated with the phrase "consideration" as defined in the statute.
The CESTAT has held that the term 'notice pay' mentioned in the employment contract cannot be considered as a service, more specifically as a taxable service, inasmuch as neither of the parties to the contract have provided any service to each other. Thus, the phrases "service" defined in Section 65B (44) and "declared service" as defined in Section 65B (22) are not applicable for consideration of such activity as a service for the purpose of levying service tax. The amount received as compensation by the appellants cannot be equated with the term 'consideration' as the latter is received for performance under the contract, whereas the former is received if the other party fails to perform as per the contractual norms.
The tribunal relied on the decision of the Madras High Court in the case of GE T & D India Limited, in which it was held that in the absence of rendition of any taxable service, the amount received as consideration cannot be termed as a taxable service for the purpose of the levy of service tax.
Case Title: M/s. XL Health Corporation India Pvt. Ltd. Versus Commissioner of Central Tax, Bengaluru South Commissionerate
Citation: Service Tax Appeal No. 20648 of 2019
Counsel For Appellant: Ravi Banthia & Ms. Madhuri Rau, CA