TaxTMI 
TaxTMI 
2022 (3) TMI 1143
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.... to recover the notice pay from the agreed portion of salary to compensate the loss to the appellant company. It further submitted that in case the employee resigns and leaves without serving the notice period, the company is deducting the notice pay amount for unserved notice period to cover the loss of company for immediate recruitment of new candidates and also to regularize the activities not handed over to upcoming employee. It was also submitted that the notice period amount recovered/paid from/by the employee/employer should not be under the purview of GST since it is an arrangement to compensate the loss to employer/employee as per contractual arrangement. In the above backdrop, it raised the following question for advance ruling - "Whether the applicant is liable to pay GST on recovery of Notice Pay from the employees who are leaving the company without completing the notice period as specified in the Appointment Letter issued as per the contract entered between Employer and the Employee?" 2. The GAAR examined the aforesaid question and vide Advance Ruling No. GUJ/GAAR/R/51/2020 dated 30.07.2020 answered in affirmative i.e. it held that the appellant is liable ....
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....ore asked whether they require fresh hearing or not. The appellant vide their mail dated 03.01.2022 informed that by virtue of recent AAAR ruling issued by Madhya Pradesh Appellate Authority for Advance Ruling which held that "GST is not applicable on payment of notice pay by an employee to the applicant in lieu of notice period", they find that their case is similar and no GST should be leviable on recovery of notice pay. They attached the copy of order dated 8.11.2021 passed by the Madhya Pradesh AAAR in the case of M/s. Bharat Oman Refineries Ltd., M.P. They further informed that they do not require personal hearing in the matter. FINDINGS (AS PER SEEMA ARORA) :- 5. We have considered the submissions made by the appellant in the appeal filed by them as well as at the time of personal hearing, Ruling given by the GAAR and other evidences available on record. 6. As per the terms of contract, in the form of 'Appointment Letter', entered into between the appellant and its employees, in case of resignation by an employee, such employee is required to give three months' notice to the appellant. In case of failure of the employee in giving such prior notice, the appellant is e....
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....iving the amount of 'liquidated damages' for the same. 7.3 As per para 5(e) of Schedule II read with section 7 of the GST Acts, 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act' is treated as supply of service. Therefore, the tolerating, by the appellant, of the act of employee leaving the job without giving three months' notice against the consideration in the form of amount equivalent to salary of unserved notice period, is covered under the 'supply of service' under section 7 read with para 5(e) of Schedule II of the CGST Act, 2017 and the GGST Act, 2017. 7.4. The classification of service has been provided in the Annexure to Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 and corresponding Notification No. 11/2017-State Tax (Rate) dated 30.06.2017(the Central Tax (Rate) Notification herein after referred to includes the reference to corresponding State Tax (Rate) Notification also]. As per the said scheme of classification of services, Group 99979 for 'other miscellaneous services', inter-alia covers the following - Service Code (tariff) Description of service 999792 Agreeing to do an act ....
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.... or breach of contract for which consideration in the form of liquidated damages is payable to the appellant is neither exempted under Notification nor covered under para 1 of Schedule III of the GST Acts. 9. The appellant has referred to several case laws. It has been observed that the decisions in the cases of GE T & D India Limited Vs. Deputy Commissioner of Central Excise, Gujarat State Fertilizers and Chemical Ltd., and HCL Learning System Vs. CCE, Noida were rendered in the context of Services Tax (Finance Act, 1994) and therefore are not squarely applicable in the facts of the present case. The decision in the case of Nandinho Rebello Vs. Deputy Commissioner of Income Tax pertains to the provisions of Income Tax Act, 1961 and hence is not applicable in the facts of the present case. 10. We find that the appellant has relied upon Order dated 8.11.2021 issued by the Appellate Authority for Advance Ruling(AAAR), Madhya Pradesh in the case of M/s. Bharat Oman Refineries Limited, Madhya Pradesh to support their contention. In this regard, we have to emphasize here that decisions of Advance Ruling Authorities cannot be relied upon by the appellant, since, as per the provisio....
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....defined in clause (105) of section 2 of the CGST Act, which is reproduced as under: Section 2 (105) :- "supplier" in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied; Thus, in term of above definition, to qualify any person as "supplier", such person should be engaged into supply of goods or services or both. 13.3 Before, determining any person as supplier, the activity or transaction of goods or services carried out by such person should be covered within the scope of "supply". The scope of "supply" is denoted in section 7 of the CGST Act which is reproduced as under: Section 7. Scope of supply.- (1) For the purposes of this Act, the expression ― "supply" includes-- (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; (b) import of services for a consideration whether or not in t....
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....nd an option to the employee whether or not to perform. It protects the employer in case of early cessation of service by the employee. The term "made or agreed to be made" used in the definition of "supply" suggests a certain degree of voluntary act on part of the service provider. The act of notice pay recovery is only an extinguishment of the obligation of the employee which does not constitute an independent/voluntary act by the employer. Thus, the act of notice pay recovery arises as a condition of breach of contract and is not a contract in itself to qualify as a supply. 13.4.2 Absence of service element: As the activity is not relating to tangible goods, it is required to be ascertained whether it involves the element of services, especially "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act". The involvement of above service element in the contract can only be ascertained, when there is a specific performance obligation to do so, to honor the contract. As the 'toleration of breach' by the employer is not a voluntary act, the condition of breach indicated in the contract, by no stretch of imagination can be inferred t....
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.... above, it can be inferred that notice pay recovery neither is a consideration, nor does it flow at the discretion of the service provider. Further, there is no benefit accruing to the employer, moreover he has suffered from the sudden exit of the employee. 13.4.3.4 Damage vs consideration: Damage in its general connotation means money compensation for loss or injury caused by the wrongful act of the other. Notice pay recovery is a damage arising out of breach of the contract of employment which curtails the time period of the employer to find a competent and suitable replacement. It also hampers the smooth administration of the work which was hitherto carried out by the employee. Damages are never an alternative mode of performance. It is not the voluntary act of the employer to recover the notice pay damages for injury caused by the employee. It is also relevant to note that the Honourable CESTAT Chennai in the case of Commissioner of Service Tax vs. Repco Home Finance Limited STA No.511 of 2011 LB-2018 dated 08.07.2020 has distinguished "damages as a condition of contract and consideration". In the said ruling, the CESTAT held that the foreclosure charges are imposed by the b....
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....erance of business: Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both. Now, it is required to be ascertained whether act of notice pay recovery by the employer is included in para 2 of Schedule I or not. 13.4.5.3 As per sub-clause (iii) of clause (a) in the explanation to section 15 of the Act, employer and employee are deemed to be considered as related persons. Therefore, supply of goods or services between employer and employee, when made in the course or furtherance of business, may be considered as supply. 13.4.5.4 In the instant case, though employer and employee are deemed to be considered as related persons, there is no supply of either goods or services. In addition, as the act is not made in the course or furtherance of business, it is not covered under Schedule I of the Act. 13.4.6.1 Transaction is not covered in Schedule III. As per section 7 (2) of the act, activities or transactions specified in Schedule III shall be treated neither as a supply of goods nor a supply of services. Para 1 of Schedule III covers services by an e....
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....mployer as notice pay in lieu of sudden termination gives rise to rendition of service either by employer or by employees under section 65 of Finance Act, 1994. 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 non-compete. Notice pay, in lieu of sudden termination however, does not give rise to the rendition of service either by the employer or the employee. 13.4.8 Thus, in view of the foregoing para 13.4.1 to 13.4.7, the act of recovery of an amount by the appellant from the employee, for failure to give prior notice is outside the scope of supply of service as specified in section 7 of the Act. 14.1 As per para 5 (e) of Schedule II of the GST Acts, 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act' is treated as supply of service. Therefore, it is argued that the tolerating, by the appellant, of the act of employee leaving the job without giving three months' notice against the consideration in the form of amount equivalent to salary of unserved notice period....