No Service Tax on Notice Pay Recovery by Employer from Employee: Madras HC [Read Judgment]

The Madras High Court has ruled that the amount received by an employee from the employer on premature termination of the contract/notice pay recovery of employment will not be chargeable to Service Tax.

The petitioner is a dealer assessed to service tax by the respondent. The terms of employment of the petitioner company include a stipulation for a notice period prior to quitting from employment, ranging from two to three months. An option is provided to the employees to the effect that if they are not in a position to stay and serve out the notice period, then in lieu of the same, the employee will be required to pay the equivalent pay of salary for the period for which notice was not served.

Thus, in a case where an employee wishes to quit, it is incumbent upon the employee to put the employer to notice in advance of a stipulated period to enable recruitment of a new employee and smooth transition of the work carried on by the employee, who proposes to quit. It also facilitates a situation where the employee may desire immediate quitting by enabling him to do so, however, also ensuring that some compensation is provided to the employer by virtue of the sudden and unexpected termination of duty.

The petitioner, in this case, had received certain amounts in lieu of notice period from outgoing employees. The Assessing Officer was of the view that this amount would attract service tax since the petitioner is deemed to have facilitated the termination of employment and thus a category of service entitled and described as ‘facilitation of termination of employment’ was carved out by the Assessing Officer.

While allowing the Writ Petition filed by GE T & D India Limited, Justice Anita Sumanth observed that, “the amounts paid by the employer to the employee for premature termination of a contract/notice pay recovery of employment are treatable as amounts paid in relation to services provided by the employee to the employer in the course of employment. Hence, amounts so paid would be chargeable to service tax”.

The Court also observed that the employer cannot be said to have rendered any taxable service and has merely facilitated the exit of the employee upon imposition of a cost upon him for the sudden exit.