Service tax cannot be levied on notice pay received by employers from employees for premature resignation

CESTAT NEW DELHI held that service tax cannot be levied on notice pay received by employer from employees for premature resignation. The tribunal ruled that employer does not render any taxable service by permitting sudden employee exit upon compensation. Notice pay merely facilitates employee departure and does not constitute consideration for declared service under Section 66E. Following precedents from Principal Bench and Madras HC, the tribunal determined that notice pay in lieu of termination does not create service rendition by either party. The demand for service tax on notice pay was set aside and appeal allowed.

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Issues involved:
The issues involved in the judgment include the non-payment of Service Tax on a notice period recovery, demand of Service Tax under reverse charge mechanism on Renting of Immovable Property Service, and the interpretation of Section 66E(e) of the Finance Act, 1994.

Issue 1: Service Tax on Notice Period Recovery
The Department alleged that the appellant did not pay Service Tax on a notice period recovery amount received from an employee for giving up the job without prior notice. The Department contended that this amount falls under the category of 'Declared Service' u/s 66E(e) of the Act. The demand for Service Tax on this amount was confirmed by the Commissioner (Appeals), leading to the appeal. The Tribunal held that the employer did not render any service but facilitated the employee's exit by imposing a cost for sudden termination. It was concluded that the amount received in lieu of notice period does not attract Section 66E(e) and is not liable for Service Tax.

Issue 2: Demand of Service Tax under Reverse Charge Mechanism
Initially, the proposal included the recovery of Service Tax under reverse charge mechanism on Renting of Immovable Property Service. However, the Commissioner (Appeals) dropped this demand in the appeal. The Tribunal did not delve deeper into this issue as the demand was already dropped by the Commissioner (Appeals).

Interpretation of Section 66E(e) of the Finance Act, 1994
The Tribunal analyzed Section 66E(e) which defines 'Declared Services' to include agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. The Revenue argued that the notice period amount constitutes payment for an obligation to tolerate an act or situation. However, the Tribunal referred to previous decisions and CBEC guidance notes to conclude that the employer did not render any service but allowed the employee's sudden exit upon compensation. It was held that the employer did not 'tolerate' any act of the employee, and the amount received in lieu of notice period does not give rise to the rendition of service, thus not attracting Section 66E(e).

In conclusion, the Tribunal set aside the Order-in-Original confirming the demand of Service Tax on the notice period recovery amount, as it was wrongly held to be towards rendering the Declared Service. The appeal was allowed in favor of the appellant.

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