2024 (11) TMI 1284 - AT - Service Tax

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

Commissioner of Central Tax, Pune – I Versus Vodafone India Services Pvt Ltd

The Appellate Tribunal CESTAT Mumbai concluded that amounts collected by employers from employees for premature termination of employment contracts are ... Service tax on amounts received by an employee from the employer on premature termination of contract of employment - HELD THAT:- We find that the issue is no longer res integra in view of the decision of GE T & D INDIA LIMITED (FORMERLY ALSTOM T & D INDIA LIMITED) VERSUS DEPUTY COMMISSIONER OF CENTRAL EXCISE [2020 (1) TMI 1096 - MADRAS HIGH COURT] as followed in M/S HCL LEARNING LIMITED [2019 (12) TMI 558 - CESTAT ALLAHABAD] wherein held the employer cannot be said to have rendered any service per se much less a taxable service and has merely facilitated the exit of the employee upon imposition of a cost upon him for the sudden exit. The definition in clause (e) of Section 66E is not attracted as the employer has not 'tolerated' any act of the employee but has permitted a sudden exit upon being compensated by the employee in this regard. Though normally, a contract of employment qua an employer and employee has to be read as a whole, there are situations within a contract that constitute rendition of service such as breach of a stipulation of noncompete. Notice pay, in lieu of sudden termination however, does not give rise to the rendition of service either by the employer or the employee. No merit in the appeal of jurisdictional Commissioner of Service Tax which is dismissed. 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.