The Allahabad bench of the Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) has held that service tax not leviable on notice pay recovered from employee and upheld the order in favour of Barclays Global Service Centre Pvt. Ltd. Since the matter has already been decided by the Tribunal in number of cases and the Board has decided not to file appeal/pursue the civil appeal filed before the superior Courts, the dispute has attained finality.
The revenue filed the appeal against Order-in-Appeal passed by Commissioner (Appeals) Central Goods & Services Tax, Noida. The Assesee was engaged in provision of various taxable services. During the period from April, 2014 to June, 2017, the Appellant recovered certain amount as “notice pay” as full and final settlement from his employees who left the company prematurely without complying with the conditions of the notice period as per terms and conditions of appointment letters/service agreements.
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Objection was raised by the audit that the amount of „notice pay‟ recovered by the Appellant from the employees was service consideration against provision of taxable service “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” which was a „declared service‟ as per clause (e) of Section 66E of the Finance Act, 1994. During the period from 01.04.2014 to 30.06.2017, the Appellant recovered „notice pay‟ from the employees for which three SCNs were issued to the Appellant demanding service tax of Rs.87,33,263/- on such „notice pay‟ with interest and penalty, which was confirmed by the Adjudicating Authority vide the impugned orders dated 28.11.2018.
Being aggrieved the Assessee filed the appeal before the first Appellate Authority wherein held that the term ‘service’ as defined in clause (44) of section 65B of the Finance Act 1994 means any activity carried out by a person for another for consideration, and includes a ‘declared service’. The term ‘declared service’ is also defined in the said section as an activity carried out by a person for another for consideration and specified in section 66E of the Act, which includes the declared service – “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” [Section 66E(e)].
It was alleged in the SCN issued by the department that the appellant agreed to tolerate the situation of leaving the company by the employees without complying the condition of serving the agreed notice period in return for payment of ‘notice pay’, which would constitute a service consideration against provision of taxable ‘declared service’ specified in section 66E(e) of the Act under the category of “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” and was therefore liable for payment of service tax.
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In the instant case, the appellant is charging certain amount as ‘notice pay only, against some employees who resigned from the company without following the agreed upon procedure, as a compensation to ensure continuity in job/service and therefore, the same cannot be said to be a consideration for tolerating any act. The ‘notice pay’ is not the desired income or result of any contract/agreement but is recovered for compensating the loss or damage suffered by the appellant company. On the face of it, payments of such ‘notice pay’ are not in the nature of consideration for an activity but compensatory in nature and hence, do not constitute a provision of ‘declared service’ liable for levy of service tax.
The said transactions also cannot be treated as service in view of Section 65B(44) of the Act which specifically provides that it does not include transactions only in money or actionable claim. I also find that Section 65B(44) of the Act contains exclusions and that the issue at hand falls in clause (b) which is in the nature of employer and employee relationship which is outside the scope of service tax in as much as the recovery of the damages suffered by the company on the abrupt resignation of an employee is compensatory in nature which is precedent or a precondition to the employment and as such it is purely an employer and employee relationship.
The CESTAT, South Zonal Bench, Bangalore, in the case of Waltair Club vs. CCE&ST, has, prima facie, observed that demand of service tax on penal interest collected from members of club for default in payment is not sustainable. In light of the judgement, the Tribunal held that the appellant is not liable to pay service tax on ‘notice pay’ recovered by him during the material period and therefore, instant demand of service tax is not sustainable. Being aggrieved with the impugned Order-in-Appeal, the Department has filed the present appeal before the Tribunal.
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A two member bench of P.K. Choudhary, Member ( Judicial ) and Sanjiv Srivastava, Member ( Technical ) observed that it is clarified that the activities contemplated under section 66E(e), i.e. when one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act, are the activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity. Field formations are advised that while taxability in each case shall depend on facts of the case, the guidelines discussed above and jurisprudence that has evolved over time, may be followed in determining whether service tax on an activity or transaction needs to be levied treating it as service by way of agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. Contents of Circular No.178/10/2022GST, dated 3rd August, 2022, may also be referred to in this regard.
Since the matter has already been decided by the Tribunal in number of cases and the Board has decided not to file appeal/pursue the civil appeal filed before the superior Courts, the dispute has attained finality. Accordingly, there is no occasion to take a different view. The Tribunal dismissed the appeal.
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