The Customs, Excise & Service Tax Appellate Tribunal, Ahmedabad ruled that no service tax is applicable on the amount recovered from the employee for quitting employment.
The division bench of Ramesh Nair, Judicial Member And C L Mahar, Technical Member observed that the Tribunal has considered the same issue in the case of Intas Pharmaceuticals in which is was held that such 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. Hence, amounts so paid would [not] be chargeable to service tax. However any amount paid for not joining a competing business would be liable to be taxed being paid for providing the service of forbearance to act.
It was further observed in the Intas Pharmaceuticals case that a contract of employment qua an employer and employee has to be read as a whole, there are situations within a contract that constitute rendition of service such as breach of a stipulation of noncompete. 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 bench said that the Allahabad Tribunal has taken the same view in the case of Shriram Pistons and Rings Ltd in which it was held that the term of contract between the appellant and his employee are that employee shall be paid salary and the term of employment is a fixed term and if the employee leaves the job before the term is over then certain amount already paid as salary is recovered by the appellant from his employee. This part of the recovery is treated by Revenue as consideration for charging service tax. The said recovery is out of the salary already paid and we also note that salary is not covered by the provisions of service tax.
The issue involved in the case is whether the demand of service tax under Section 66 E of Finance Act for ‘tolerating an act’ for the Notice Pay i.e. the amount recovered from an employee for quitting a job before the time period prescribed under an agreement/ job letter is sustainable or otherwise.
Dhaval Shah Counsel appearing on behalf of the appellant submitted that the demand is not sustainable as the Notice Pay (tolerating an act) of an employee is not a declared service as it does not fall under the service.
The tribunal held that the amount recovered from the employee for quitting the employment without serving notice during the period the said amount is not liable to service tax.
Case Details
Case Name: Gujarat Co Operative Milk Marketing Federation Ltd v/s Commissioner of C.E. & S.T.
Citation: Service Tax Appeal No. 12871 of 2018
Tribunal: CESTAT Ahmedabad
Decision Date: 27/08/2024
