2026 (3) TMI 411 - AT - Service Tax

Declared Service scope narrowed: recoveries for notice pay and bond money are compensation, not taxable declared services.

Amounts recovered by an employer from employees as notice pay or bond money for premature termination or failure to serve an agreed period are not treated ... Entitlement for refund - Compensation received for failure to perform under a contract - constitutes a declared service under Section 66 (e) of the Finance Act, 1994 - money received in the form of “notice pay” and “bond money” by the appellants from their employees - non-performance of contract - liquidated damages characterization - value of service - refund claim under central excise - HELD THAT:- Notice pay and bond money - HELD THAT: - The Tribunal held that amounts recovered from employees on premature termination or failure to serve the agreed period do not constitute the rendition of a service by the employer and therefore do not fall within the scope of a 'declared service' under Section 66E(e). The reasoning, following the view of the Madras High Court in GE T & D [2020 (1) TMI 1096 - MADRAS HIGH COURT] and tribunal precedents, is that such recoveries merely facilitate an employee's exit by imposing a cost and operate as penalties or deterrents rather than consideration received in return for agreeing to refrain from, tolerate, or do an act. The Tribunal also noted departmental clarifications under GST and service tax which excluded forfeiture of salary or bond payments from taxable supply, and observed that the issue has been decided in favour of the appellant in related proceedings of the jurisdictional officer. In view of settled precedents and the categorical distinction between liquidated damages/service and penal recoveries on premature exit, the impugned orders affirming taxability were found unsustainable. [Paras 7, 8, 9] Amounts recovered as notice pay and bond money are not taxable as a declared service; the appeals are allowed with consequential relief. Final Conclusion: The Tribunal allowed the appeals, holding that notice pay and bond money recovered from employees for premature exit are not taxable as a declared service, and granted consequential relief including entitlement to refunds as per law. Issues: Whether amounts recovered by an employer from employees as 'notice pay' or 'bond money' for premature termination or failure to serve an agreed period constitute a taxable declared service under Section 66(e) of the Finance Act, 1994 and therefore are not refundable.Analysis: The matter examines whether (i) an employer's receipt of notice pay or bond money is an activity falling within clause (e) of the declared services definition and (ii) such receipt is consideration for agreeing to refrain from an act, to tolerate an act or to do an act. The analysis applies the statutory framework of declared services together with value provisions, considers precedents holding that forfeiture or recovery on premature exit does not amount to rendition of service but operates as a penalty or liquidated dissuasive measure, and notes departmental and circular clarifications to similar effect. The reasoning relies on authorities construing the concept of declared service narrowly to exclude amounts obtained as compensation for non-performance or premature termination where no service is rendered by the employer in return.Conclusion: The amounts recovered as notice pay and bond money do not constitute a declared service under Section 66(e) of the Finance Act, 1994 and the appellants are entitled to relief; the appeals are allowed with consequential relief as per law, in favour of the assessee.