Kerala HC grants GST refund on notice pay, rules departmental circular makes it non-taxable under Article 226

The Kerala HC allowed a writ petition challenging GST demand on notice pay received from former employees. The court held that since the GST Appellate Tribunal was not constituted, the petitioner had no alternative remedy and could approach the HC under Article 226. The court ruled that a departmental circular clarified notice pay was not taxable under GST laws, and such circulars are binding on the department per SC precedents. The petition was allowed, granting refund of GST paid on notice pay.

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Issues Involved:
1. Liability to pay GST on notice pay received from former employees.
2. Applicability of the Central Board of Indirect Taxes and Customs Circular No.178/10/2022-GST.
3. Retrospective application of beneficial Circulars.
4. Maintainability of the writ petition in the absence of the GST Appellate Tribunal.

Issue-Wise Detailed Analysis:

1. Liability to Pay GST on Notice Pay Received from Former Employees:
The petitioner, a non-banking finance company, challenged the appellate authority's decision that upheld the original authority's order, which rejected the claim for a refund of GST paid on notice pay received from former employees. The petitioner argued that the notice pay should not be subject to GST as it is not a consideration for any service rendered but rather a penalty for premature termination of employment.

2. Applicability of the Central Board of Indirect Taxes and Customs Circular No.178/10/2022-GST:
The petitioner relied on Circular No.178/10/2022-GST dated 3.8.2022, which clarified that amounts recovered by the employer as notice pay are not taxable as consideration for the service of agreeing to tolerate an act or situation. The Circular stated that such amounts are penalties to discourage non-serious employees and do not constitute a taxable service.

3. Retrospective Application of Beneficial Circulars:
The petitioner contended that the beneficial Circular should apply retrospectively to all past transactions, citing the Supreme Court's judgment in Suchitra Components Ltd. v. Commissioner of Central Excise (2006) 12 SCC 452. The Court agreed, noting that Circulars in the nature of Ext.P8 are binding on the GST Department and must be applied retrospectively, as established in the judgments of Navnit Lal C. Javeri v. K.K. Sen (1965) 56 ITR 198 and K.P. Varghese v. Income Tax Officer (1981) 4 SCC 173.

4. Maintainability of the Writ Petition in the Absence of the GST Appellate Tribunal:
The respondent Department argued that the writ petition was not maintainable as the petitioner could wait for the constitution of the GST Appellate Tribunal. However, the Court held that the petitioner had no other remedy due to the non-constitution of the Tribunal and was entitled to approach the Court under Article 226 of the Constitution of India. The Court emphasized that the period of limitation starting from the date of the Tribunal's constitution provided no immediate relief to the petitioner.

Conclusion:
The Court concluded that the petitioner was entitled to succeed. The Circular No.178/10/2022-GST clarified that notice pay is not taxable under GST laws. The Court held that the Circular should apply retrospectively and is binding on the Department. The writ petition was allowed, and the orders rejecting the petitioner's refund application were quashed. The matter was remanded to the respondent for reconsideration in light of the judgment.

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