2019 (12) TMI 1566 - HC - Service Tax

Court rules notice pay from outgoing employees not subject to service tax, aligning with CBEC guidance.

The court ruled in favor of the petitioner, holding that amounts received by a company from outgoing employees in lieu of notice period do not attract ... Service tax on receipts from rendition of services - declared services and clause relating to agreeing to the obligation to refrain from an act - interpretation of Section 66E(e) regarding forbearance/permission to quit - provision of service by an employee to the employer outside the ambit of service - payment in lieu of notice not constituting rendition of service - CBEC guidance on taxability of amounts on premature termination of employmentInterpretation of Section 66E(e) regarding forbearance/permission to quit - payment in lieu of notice not constituting rendition of service - service tax on receipts from rendition of services - CBEC guidance on taxability of amounts on premature termination of employment - Payment received by the employer in lieu of employees serving the stipulated notice period is not a taxable service under Section 66E(e) and does not attract service tax. - HELD THAT: - The court examined the scope of levy of service tax on receipts from rendition of services and the category of declared services under the Act, including clause (e) of Section 66E concerning agreement to refrain from an act or to tolerate an act. Reliance was placed on the CBEC Guidance which states that amounts paid by an employer to an employee on premature termination of contract of employment are related to services provided by the employee in the course of employment and are not chargeable as a separate service; conversely, amounts paid for forbearance to join a competing business are taxable. Applying that principle to the facts, the court held that where an employee pays the employer in lieu of serving a notice period, the employer has not 'tolerated' an act constituting a taxable service but has permitted an immediate exit on compensation. Notice pay in lieu of sudden termination does not amount to the rendition of any service by the employer or the employee and therefore does not fall within Section 66E(e). The court rejected the Assessing Officer's characterization of the receipt as 'facilitation of termination of employment' attracting service tax. [Paras 11, 12]The payments in lieu of notice are not exigible to service tax; the Assessing Officer's classification under Section 66E(e) is not upheld.CBEC guidance on taxability of amounts on premature termination of employment - alternate statutory remedy and judicial relief - Petitioner need not be relegated to the alternate statutory appellate remedy where the matter involves interpretation of statutory provisions on undisputed facts and merits were considered. - HELD THAT: - Though the respondent urged that an alternate remedy existed and the petitioner should be relegated to it, the court found that the dispute turned on the interpretation of the statutory provision (Section 66E(e)) in light of undisputed facts. Having decided the question on merits (consistent with the analysis in the earlier order dated 07.11.2019), the court declined to remit the petitioner to the statutory appellate mechanism and proceeded to grant relief by quashing the impugned assessment orders. [Paras 1, 13]Alternate remedy plea rejected; writ petition entertained on merits and allowed.Final Conclusion: Writ petitions allowed; impugned assessment orders quashed on the ground that payments in lieu of notice do not constitute a taxable service under Section 66E(e); plea of alternate statutory remedy rejected; connected miscellaneous petitions closed with no costs. Issues:Interpretation of service tax liability on amounts received in lieu of notice period by outgoing employees.Analysis:The judgment dealt with the issue of service tax liability on amounts received by a company from outgoing employees in lieu of notice period. The Assessing Officer contended that such amounts would attract service tax under the category of 'facilitation of termination of employment.' The petitioner challenged this contention through writ petitions after seven show cause notices were issued. The court examined the definition of 'service' under Section 65(44) of the Finance Act, 1994, which excludes services provided by an employee to the employer in the course of employment. The Revenue argued that the arrangement of payment in lieu of notice falls under Section 66E(e) of declared services, constituting taxable service.The court referred to CBEC's Guidance Notes, which clarified that amounts paid by an employer to an employee for premature termination of employment are not chargeable to service tax as they are not related to the rendition of service. The court agreed with this interpretation, stating that the employer did not render any taxable service but merely facilitated the employee's exit upon being compensated. The court distinguished between situations like breach of non-compete stipulations constituting service and notice pay for sudden termination, which does not amount to service.The court rejected the argument of availability of an alternate remedy, emphasizing that the matter involved an interpretation of statutory provisions based on undisputed facts. The court concluded that the writ petitions are allowed, and connected miscellaneous petitions are closed without imposing any costs. The judgment provides clarity on the non-taxability of amounts received in lieu of notice period in the context of service tax liability, aligning with CBEC's guidance and statutory provisions.