Employers' Notice Pay for Early Contract Termination Not Subject to Service Tax, Rules Tribunal.

The Appellate Tribunal CESTAT Mumbai concluded that amounts collected by employers from employees for premature termination of employment contracts are not subject to service tax. The Tribunal referred to decisions by the Hon'ble High Court of Madras and the Tribunal in similar cases, affirming that such payments do not constitute taxable services. The Tribunal determined that notice pay for sudden termination does not equate to the provision of a service by either party. Consequently, the appeal by the jurisdictional Commissioner of Service Tax was dismissed, confirming the non-chargeability of service tax on these amounts.

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Issues:
Interpretation of service tax liability on amounts collected by employer from employees for premature termination of employment contracts.

Analysis:
The judgment by the Appellate Tribunal CESTAT Mumbai delves into the issue of whether amounts collected by an employer from employees for premature termination of employment contracts are liable to service tax. The case involved M/s Vodafone India Services Pvt Ltd collecting a sum from employees by recourse to contract, leading to a demand for recovery of service tax by the jurisdictional service tax authority. The original authority based its decision on the Education Guide of the Central Board of Excise & Customs, which stated that such amounts paid by the employer to the employee for premature termination of a contract of employment are not chargeable to service tax. However, the jurisdictional Commissioner of Central Excise and Service Tax appealed this decision, leading to further review.

The reviewing authority proposed taxing the amount under section 73 of the Finance Act, 1994, based on the interpretation of declared services under section 66E of the same Act. The reviewing authority considered the notice period and compensation payable to the employer for tolerating an act or situation as consideration for service tax liability. The review committee emphasized the legal superiority of the enumeration of declared service and criticized the reliance on the Education Guide by the lower authorities. The committee disregarded the decisions of the Hon'ble High Court of Madras and the Tribunal, which guided the lower authorities in not accepting the service tax proposals.

The Appellate Tribunal, after hearing both parties, referred to the decisions of the Hon'ble High Court of Madras and the Tribunal in similar cases, which clarified that amounts received by an employee from the employer for premature termination of employment contracts are not liable to service tax. The Tribunal highlighted that the employer did not render any service per se but facilitated the employee's exit upon being compensated for the sudden termination. The Tribunal emphasized that notice pay, in lieu of sudden termination, does not constitute the rendition of service by either party. Consequently, the appeal of the jurisdictional Commissioner of Service Tax was dismissed, affirming the non-chargeability of service tax on such amounts.

In conclusion, the judgment provides clarity on the service tax liability concerning amounts collected by employers from employees for premature termination of employment contracts. It establishes that such payments do not fall within the ambit of taxable services, as clarified by the decisions of the Hon'ble High Court of Madras and the Tribunal, thereby dismissing the appeal of the jurisdictional Commissioner of Service Tax.

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