2020 (1) TMI 1096 - HC - Service Tax

Outgoing employees' notice period payments not taxable as service under Section 66E(e).

The court held that payments received in lieu of notice period by outgoing employees do not attract service tax as they do not constitute a taxable ... Service tax - service - declared services - provision of service by an employee to the employer - agreement to refrain from an act / forbearance to act - facilitation of termination of employmentService tax - facilitation of termination of employment - agreement to refrain from an act / forbearance to act - provision of service by an employee to the employer - Whether amounts received by the employer from employees in lieu of the notice period constitute a taxable service under Section 66E(e) as 'facilitation of termination of employment'. - HELD THAT: - The Assessing Officer characterised payments received by the petitioner from outgoing employees in lieu of serving a contractual notice period as a taxable service described as facilitation of termination of employment under Section 66E(e). The Court examined the statutory definition of 'service' and the declared services in Section 66E, and relied on the CBEC Guidance Note which treats amounts paid by an employer to an employee for premature termination of employment as relating to services provided by the employee to the employer and thus not chargeable as a service by the employer. Applying the same principle in the converse situation, the Court held that the employer does not render a service by permitting an employee's sudden exit in exchange for payment; the employer merely accepts compensation for the employee's failure to serve the contractual notice. The Court found that clause (e) of Section 66E is not attracted because the employer has not 'tolerated' an act in the sense of providing a forbearance service; rather, the arrangement is a contractual mechanism to permit exit on payment and does not constitute rendition of a taxable service by either party. The Court further distinguished situations where separate obligations (such as non compete stipulations) may amount to rendition of service, observing that notice pay in lieu of service of notice does not fall within that class. [Paras 11, 12]Payments made to the petitioner by employees in lieu of serving a contractual notice period do not constitute a taxable service under Section 66E(e) and are not liable to service tax as 'facilitation of termination of employment'.Service tax - alternate remedy - Whether the writ petitions should be relegated to the statutory appellate remedy instead of being entertained by the High Court. - HELD THAT: - The Revenue urged that the petitioner should be directed to pursue the statutory appeal remedy. The Court observed that the dispute principally involved interpretation of the statutory provision in light of undisputed facts and that there was no need to remand the matter to the appellate forum for determination. Accordingly, the plea for relegation to the alternate remedy was rejected. [Paras 13]The High Court entertained the petitions and declined to remit the matter to the statutory appellate forum; the plea for relegation to alternate remedy is rejected.Final Conclusion: Writ petitions allowed: the impugned orders confirming service tax on payments made by employees in lieu of notice periods are set aside; connected miscellaneous petitions closed; no costs. Issues:Interpretation of service tax liability on amounts received in lieu of notice period by outgoing employees.Analysis:The petitioner, a service tax-assessed dealer, had a provision in employment terms requiring a notice period before quitting, with an option for employees to pay in lieu of notice. The Assessing Officer considered these payments as attracting service tax under a category of service termed 'facilitation of termination of employment.' Seven show cause notices were issued, leading to confirmed assessment orders challenged in writ petitions.Service tax is levied on activities for consideration, excluding certain transactions like employee services to the employer. The Revenue argued that payments in lieu of notice fall under Section 66E(e) as an agreement to refrain from an act, constituting a taxable service. However, the CBEC's Guidance Notes clarified that amounts for premature termination of employment are not taxable as they relate to services provided by the employee, not the employer.The court analyzed Section 66E(e) and the CBEC's guidance, concluding that payments in lieu of notice do not constitute a taxable service. The employer did not render a service but permitted sudden exits upon compensation from the employees. While breach of noncompete stipulations in employment contracts may constitute a service, notice pay for sudden termination does not. The court rejected the Revenue's argument and upheld that the employer did not 'tolerate' any act but allowed sudden exits with compensation.The court dismissed the plea for an alternate remedy, stating that the matter involved interpreting statutory provisions based on undisputed facts, negating the need for a statutory appeal. Consequently, the writ petitions were allowed, and connected miscellaneous petitions were closed without costs.