Appeal Dismissed: Recovery for Notice Period Waiver not Taxable, No Service Rendition

The Appellate Tribunal dismissed the appeal filed by Revenue, affirming that the recovery of an amount by the employer from the employee for waiving the notice period did not attract Service Tax as it did not constitute the rendition of service. The Tribunal relied on the settled position by the High Court, emphasizing that notice pay, in lieu of sudden termination, does not give rise to the rendition of service by either party. The judgment clarified the distinction between breach of contract situations and notice pay, ultimately ruling in favor of the appellant.

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Issues involved:
1. Appeal against dropping of demand of Service Tax by Revenue.
2. Whether Service Tax can be demanded on the amount recovered by the employer from the employee for granting waiver of mandatory notice period prescribed in the agreement.

Analysis:

Issue 1: Appeal against dropping of demand of Service Tax by Revenue
The appeal filed by Revenue challenges the order of Commissioner (Appeals) regarding the dropping of demand of Service Tax. The Revenue argued that the contractual agreement between the employer and employee, where the employee agrees not to leave employment before the prescribed period or pay a penalty, falls within the ambit of declared services under Sec. 66E(e) of the Finance Act, 1994. The Revenue contended that the employer has agreed to tolerate the breach of contract by the employee in exchange for receiving one month's pay, making it subject to service tax. The Commissioner (Appeals) was criticized for failing to appreciate the term 'declared service' under Sec. 66E(e) in the context of the contractual agreement and breach of contract by the employee.

Issue 2: Service Tax on amount recovered by the employer from the employee for granting waiver of notice period
The core issue revolved around whether Service Tax could be demanded on the amount recovered by the employer from the employee for waiving the mandatory notice period prescribed in the employment contract. The Counsel for the appellant argued that the issue had been settled by the Hon'ble High Court of Madras in a specific case, citing that such amounts paid by the employer to the employee for premature termination of a contract of employment are not chargeable to service tax. The High Court's decision clarified that the employer's facilitation of the employee's sudden exit upon being compensated did not constitute the rendition of service, thus not attracting the provisions of Section 66E(e) of the Finance Act, 1994. The High Court emphasized that notice pay, in lieu of sudden termination, does not give rise to the rendition of service by either the employer or the employee.

In conclusion, the Appellate Tribunal, citing the settled position by the Hon'ble High Court of Madras, dismissed the appeal, affirming that the employer recovering an amount from the employee for waiving the notice period did not attract Service Tax as it did not constitute the rendition of service. The judgment clarified the distinction between situations involving breach of contract and notice pay, emphasizing that the latter does not give rise to the rendition of service.

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