The Bangalore bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that the service tax cannot be leviable on the amount of compensation paid by the employee to the employer for resigning without notice.
The appellants, XL Health Corporation India Pvt. Ltd. had collected certain amount as ‘Notice Period Pay’ or ‘Bond Enforcement Amount’ from their employees, who want to quit the job without notice or do not serve the organization for the prescribed period as per terms of the employment contract. During the course of audit of records maintained by the appellants, the Department observed that the appellants did not pay service tax on the consideration received on account of ‘notice pay’ from the employees and proceeded accordingly.
A coram of Mr. S.K. Mohanty, Judicial Member and Mr. P. Anjani Kumar, Technical Member found that the term ‘notice pay’ mentioned in the employment contract cannot be considered as a service, more specifically as the taxable service inasmuch as neither of the parties to the contract have provided any service to each other.
“Thus, the phrase ‘service’ defined in Section 65B (44) ibid and ‘declared service’, as defined in Section 65B (22) are not applicable for consideration of such activity as a service for the purpose of levy of service tax. Further, the amount received as compensation by the appellants cannot be equated with the term ‘consideration’ inasmuch as the latter is received for performance under the contract; whereas, the former is received, if the other party fails to perform as per the contractual norms. We find that the issue arising out of the present dispute is no more open for any debate, in view of the judgments relied upon by the learned Consultant for the appellants. The Hon’ble Madras High Court in the case of GE T & D India Limited (supra) has held that in absence of rendition of any taxable service, the amount received as consideration cannot be termed as taxable service for the purpose of levy of service tax thereon,” the Tribunal said.
Granting relief to the assessee relying on the judgment of Madras High Court, and the Tribunal decision in the case of M/s Intas Pharmaceuticals and M/s Rajasthan Vidhyut Prasaran Nigam Ltd. the Tribunal held that any compensation paid by the employee to the employer for resigning from the service without giving the requisite notice, would not be termed as consideration for the contract of employment and as such, would not fall within the preview of taxable service.
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