2024 (7) TMI 8 - AT - Service Tax

Tribunal Rules Notice Period Payments Exempt from Service Tax Under Finance Act; Appeals Allowed, Penalties Lifted.

The Tribunal ruled in favor of the appellant, determining that amounts received from employees who left without serving the notice period do not attract ... Levy of service tax - notice period pay/bond enforcement pay received by the appellant from the employees, who quit employment or resign from service without serving the stipulated notice period - consideration received for service of tolerating the act of employees or not - HELD THAT:- The issue is settled as per the Circular No. 214/1/2023-Service Tax dated 28.02.2023 and the decision in the matter of M/S RAJASTHAN RAJYA VIDHYUT PRASARAN NIGAM LTD. VERSUS COMMISSIONER OF CENTRAL GOODS AND SERVICES TAX, CUSTOMS AND CENTRAL EXCISE, JODHPUR I [2022 (1) TMI 909 - CESTAT NEW DELHI], where it was held that 'compensation for failure under a cannot is NOT consideration for service under the contract and also following the law laid down by Madras High Court in GE T&D that notice pay, in lieu of termination, however, does not give rise to the rendition of service either by the employer or the employee, the impugned order upholding confirmation of a demand of service tax on the notice pay received/recovered by the appellant from its employees for premature resignation cannot be sustained and needs to be set aside.' Considering the above facts, the amounts received by the appellant from the employees, who quit employment before the period of service without complying with the condition cannot be considered for a service and hence not liable for service tax as a declared service under clause (e) of Section 66E of the Finance Act, 1994. Appeal allowed. Issues:Whether notice period pay/bond enforcement pay received by the appellant from employees quitting without serving notice period is subject to service tax liability under Section 66E(e) of Finance Act, 1994.Analysis:The appellant, a company registered under various categories, demanded amounts from employees who left without serving the stipulated notice period. The issue revolved around the service tax liability on these amounts. The Adjudication Authority confirmed the demands and imposed penalties, leading to appeals filed before the Commissioner (Appeals). The Commissioner confirmed the demands and penalties in the impugned orders, prompting the present appeals. The appellant argued that no service was provided to employees, and there was no specific agreement to tolerate any act triggering service tax liability. Reference was made to Circular No. 214/1/2023-Service Tax for clarification on the requirement of an agreement for tolerating an act under Section 66E(e).The appellant cited the Tribunal's decision in M/s. Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. Vs. Commissioner, wherein it was held that notice pay for premature resignation does not constitute consideration for service. The appellant also referred to Circular No. 178/10/2022-GST, stating that amounts recovered from employees leaving early are penalties, not consideration for tolerating an act. The appellant argued that this circular applies to the Service Tax regime as well. Legal precedents like Kusum Ingots & Alloys Ltd. Vs. Union of India were cited to support the appellant's position.The Authorized Representative for the Revenue contended that there was a contract between the appellant and employees, making the activities passive in nature. It was argued that the nature of service could be both active and passive, as per a harmonious reading of relevant sections of the Finance Act, 1994. After hearing both sides, the Tribunal relied on Circular No. 214/1/2023-Service Tax and the decision in M/s. Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. to conclude that amounts received from employees quitting early cannot be considered for service tax under Section 66E(e). The appeals were allowed, providing consequential relief in accordance with the law.