Service tax notice on termination compensation failed after the arbitral award underpinning it was set aside.

A service tax show cause notice based on termination compensation alleged to be consideration for "agreeing to tolerate an act" could not survive once the arbitral award forming its factual foundation was set aside in curative proceedings. The Delhi HC noted that the notice depended entirely on the award to support the proposed levy, and without that award the demand lacked an independent basis. The notice was therefore liable to be quashed.

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Issues: Whether the show cause notice demanding service tax on the termination payment could survive after the arbitral award, which formed its foundation, was set aside.

Analysis: The notice proceeded on the premise that the compensation awarded under the arbitral award represented consideration for a taxable service, namely agreeing to tolerate an act. The Court noted that the challenge to the tax notice had been narrowed to this limited issue and that the award had originally supplied the factual basis for the proposed levy. Once the award itself was later set aside in curative proceedings, the very foundation on which the notice rested disappeared. In that situation, the demand could not be sustained independently of the award.

Conclusion: The show cause notice could not survive and was liable to be quashed.

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