Notice pay for employment-contract breach is compensatory, not consideration for a declared service, and remains outside service tax.

Notice pay recovered from an outgoing employee for failing to serve the stipulated notice period is compensatory payment for breach of the employment contract, not consideration for an independently agreed service. The employment-related stipulation remains within the employee-employer relationship, which is excluded from service tax. A declared service requires an independent contractual arrangement and consideration directly linked to an obligation to refrain from, tolerate, or perform an act. Notice pay, liquidated damages and breach penalties do not meet that test. Consequently, notice pay recovered from employees is not exigible to service tax.

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Issues: Whether notice pay recovered by an employer from an outgoing employee in lieu of the stipulated notice period constitutes consideration for a declared service liable to service tax.

Analysis: The employment-related notice-pay stipulation forms part of the contract of employment, and amounts recovered for an employee's failure to serve the stipulated notice period are compensatory payments for breach rather than consideration for an independently agreed activity. The statutory exclusion for services by an employee to the employer applies to matters arising from the employment relationship. The circulars clarify that declared service under the relevant provision requires an independent contractual arrangement and consideration having a direct nexus with an obligation to refrain from, tolerate, or do an act; notice pay, liquidated damages and penalties for breach lack that character.

Conclusion: Notice pay recovered from outgoing employees is not consideration for a declared service and is not exigible to service tax.

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