Notice pay recovered from employees upon premature termination not taxable under service tax

CESTAT NEW DELHI held that notice pay recovered from employees upon premature termination of employment is not taxable under service tax. The Tribunal ruled that compensation for contract failure does not constitute consideration for services, following precedent from Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. case and Madras HC decision. Notice pay does not involve service rendition by either employer or employee. The demand for service tax on notice pay recovered by appellant from employees was set aside and appeal allowed.

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Issues Involved:
The issues involved in the present appeal are non-payment of service tax on revenue share deducted by the hospital from consulting doctor's fee, fee for service plan, and non-payment of service tax on notice pay recovered from ex-employees.

Non-payment of Service Tax on Revenue Share:
The appellant, registered with the Service Tax Commissionerate, Delhi, for providing taxable services through a hospital, challenged an order proposing duty demand for non-payment of service tax on revenue share deducted from consulting doctor's fee. The Adjudicating Authority dropped a major amount of the demand related to revenue sharing agreement but confirmed a demand for notice pay received by the appellant. The appellant contended that the notice pay collected from employees does not amount to the provision of service. The Tribunal referred to previous decisions and held that compensation for premature termination of employment is not consideration for service under the contract, thus setting aside the demand for service tax on notice pay.

Conclusion:
The Tribunal found that the issue of taxability of notice pay received from employees upon premature termination of employment had already been decided in previous cases. Following the legal principles established in those cases, the Tribunal set aside the order confirming the demand for service tax on notice pay, as it does not give rise to the rendition of service either by the employer or the employee. Consequently, the appeal was allowed.

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