No Service Tax on Notice Pay Recovery: CESTAT Quashes Demand based on CBIC Circular Exempting GST [Read Order]

The Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ), Ahmedabad has held that service tax cannot be levied on the notice pay recovery as the Central Board of Indirect Taxes and Customs (CBIC) has clarified its view on the same.

The appellants M/s. Krishak Bharti Co-Operative Ltd approached the CESTAT against the confirmation of the demand of service tax.

The service tax department raised a demand in respect of recoveries made from the employees in case they violate the terms of the employment contract. The department pointed out that when trainees are employed by the appellant, the appellant spent a significant amount of time and money in training the employees therefore, the employment contract has various conditions put on the trainees. In case the trainee breaches any of those conditions, a specific amount is recoverable from the trainee. The said amount is also sought to be taxed under Section 66E(e) of the Finance Act, 1994.

A bench of Member (Judicial), Mr. Ramesh Nair, and Member (Technical), Mr. Raju observed that the CBIC has issued a circular No.178/10/2022-GST dated 3rd August 2022 in which it has stated its stand on the issue of taxability of various transactions claimed to be “liquidated damages”.

Quashing the service tax demand, the CESTAT bench held that “At the time of adjudication by commissioner and hearing before the tribunal, this circular was not available on record and therefore, the adjudicating authority could not take benefit of the same. While the issue of levibility of service tax on liquidated damages is a debatable issue, the CBIC has vide Circular No. 178/10/2022-GST clarified its stand on the subject in respect of GST. In terms of Para 5(e) of Schedule II of CGST Act as supply the following is a taxable transaction as deemed supplies.”

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Krishak Bharti Co Operative Ltd vs C.C.E. & S.T , 2023 TAXSCAN (CESTAT) 109 , Shri Jigar Shah , Shri Dinesh Prithiani