Premature Termination of Contract of Employment is Treatable as Amount paid To Service Provided by Employees in Course of Employment, No Service Tax Leviable: CESTAT [Read Order]

The Delhi bench of the Customs, Excise & Service Tax Appellate Tribunal(CESTAT) has held that premature termination of the contract of employment is treatable as the amount paid for service provided by employees in the course of employment and no Service Tax.

M/s Balaji Medical & Diagnostic Research Centre, the appellant is registered with the Service Tax Commissionerate, Delhi for providing several taxable services (medical services) through its hospital “Max Super Speciality Hospital” located in Delhi NCR.

The order has adjudicated two show cause notices proposing duty demand of Rs. 46,54,048/- for the period July 2012 to March 2016. Proportionate interest and appropriate penalties were also proposed vide both the said show cause notices. The Adjudicating Authority vide the aforesaid orders has dropped the major amount of demand which was the amount received in respect of the revenue sharing agreement, however, the demand for an amount of Rs. 6,29,329/- (Rs. 3,38,472 + Rs. 2,90,857) has been confirmed for “notice pay” received by the appellant.

Ms. Poorvi Asati, counsel appeared for the appellant and Shri Manoj Kumar, Departmental Representative appeared for the Revenue.

The appellant has mentioned that the only issue in the present appeal is the demand for service tax on the amount of “notice pay” collected from each going/exchanging employee. It is mentioned that the issue has already been decided by the Tribunal and the High Court of Madras wherein it has already been held that the pay amount received by the employee of their pre-mature resignation does not amount to the provision of service hence cannot be called as declared service under Section 66E (e) of the Finance Act.

 It was observed that compensation for failure under a cannot is NOT consideration for service under the contract and also following the law laid down by Madras High Court in GE T&D that  Notice pay, instead of termination, however, does not give rise to the rendition of service either by the employer or the employee, the impugned order upholding confirmation of demand of service tax on the notice pay received/recovered by the appellant from its employees for premature resignation cannot be sustained and needs to be set aside.

A two-member bench of Dr Ms Rachna Gupta, Member (Judicial) and Shri P V Subba Rao, Member (Technical) set aside the order under challenge. As a consequence thereof, the appeal is hereby allowed. 

To Read the full text of the Order CLICK HERE

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