The Ahmedabad Bench of the Customs Excise and Service Tax Appellate Tribunal (CESTAT) clarified on the taxability of the amount paid by an employee to an employer in exchange for vitiating the mandatory notice period to be served by the employee upon termination of employment.
The Service Tax Appeal was filed by Ami Lifesciences Pvt. Ltd., an Application Programming Interface manufacturer based in Gujarat, against the Order of the Commissioner (Appeals), Commissioner of Central Excise, Customs and Service Tax – Vadodara – I.
Get a Copy of Handbook To Income Tax Rules, Click here
The Revenue Department sought to impose Service Tax on the amount paid by the Appellant company’s employees to forgo serving the mandatory notice period under the Employment Contract.
Sub-section (e) of Section 66E (Declared Services) of the Finance Act, 1994 provides “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” as a ‘Declared Service’.
The CESTAT assessed whether the provision can be attributed to the amount paid by the employee to the employer to vitiate the notice period, and whether the same can be subject to Service Tax by the Government.
Get a Copy of Handbook To Income Tax Rules, Click here
The Tribunal observed that the present question of law is not res-integra and has been answered by the same Tribunal in the case of C.S.T.-Service Tax, Ahmedabad vs. Intas Pharmaceuticals (2021), holding that such payment by the employee to the employer to permit premature termination of employment cannot be construed as a ‘service’ that is rendered by either party towards the other.
It was further held that the employer has not ‘tolerated’ any act by the employee, and rather has only permitted the sudden exit and received compensation in lieu thereof.
Ambiguities in Section 66E(e) of the Finance Act, 1994 were previously clarified in the case of GE T & D India Limited vs. Deputy Commissioner of Central Excise (2020) where the Madras High Court held that any “amounts paid by the employer to the employee for premature termination of a contract of employment are treatable as amounts paid in relation to services provided by the employee to the employer in the course of employment” and would not be chargeable to service tax.
Get a Copy of Handbook To Income Tax Rules, Click here
Similarly, “Notice pay, in lieu of sudden termination however, does not give rise to the rendition of service either by the employer or the employee”.
The Coram of the Ahmedabad Bench of CESTAT comprising Ramesh Nair, Judicial Member and C.L. Mahar, Technical Member allowed the present Appeal in light of the aforementioned Decisions and held that the impugned order by the Revenue Department against the Appellant Assessee is not sustainable.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
