The term ‘notice pay’ mentioned in the employment contract cannot be considered as a service: CESTAT

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that any compensation paid by the employee to the employer for resigning from the service without giving the requisite notice, would not be termed as consideration for the contract of employment and as such, would not fall within the preview of taxable service.

Brief facts of the case are that during the disputed period, the appellants herein had collected certain amount as ‘Notice Period Pay’ or ‘Bond Enforcement Amount’ from their employees, who want to quit the job without notice or do not serve the organization for the prescribed period as per terms of the employment contract. During the course of audit of records maintained by the appellants, it was observed by the Department that the appellants did not pay service tax on the consideration received on account of ‘notice pay’ from the employees.

The Department had interpreted that the said activity of the appellant is covered under the declared service, defined under Section 66E (e) of the Finance Act, 1994.

The learned Consultant appearing for the appellants submitted that in absence of any taxable service being provided by the appellants to their employees, mere recovery of the notice pay from the latter will not be subjected to levy of service tax in terms of Section 66E(e) ibid. He further submitted that notice pay recovered from the employees is towards the compensation for non-performance according to the desired level and cannot be equated with the phrase ‘consideration’, defined in the statute.

As per CESTAT “The term ‘notice pay’ mentioned in the employment contract cannot be considered as a service, more specifically as the taxable service inasmuch as neither of the parties to the contract have provided any service to each other. Thus, the phrase ‘service’ defined in Section 65B (44) ibid and ‘declared service’, as defined in Section 65B (22) are not applicable for consideration of such activity as a service for the purpose of levy of service tax. “

The Tribunal further said that “the amount received as compensation by the appellants cannot be equated with the term ‘consideration’ inasmuch as the latter is received for performance under the contract; whereas the former is received if the other party fails to perform as per the contractual norms. We find that the issue arising out of the present dispute is no more open for any debate, in view of the judgments relied upon by the learned Consultant for the appellants. The Hon’ble Madras High Court in the case of GE T & D India Limited (supra) has held that in absence of rendition of any taxable service, the amount received as consideration cannot be termed as taxable service for the purpose of levy of service tax thereon.”