The stated case belongs to the old regime of service tax. The petitioner GE T&D India Limited (formerly Alstom T&D India) received certain amount in lieu of notice period from outgoing employees.
The Assessing Officer was of the view that this amount would attract Service Tax since the petitioner is deemed to be in the category of “Facilitation of termination of employment”. Accordingly show cause notice (SCN) were issued against which the petitioner moved to the court.
During the hearing, the tax department said that payment in lieu of notice constitutes payment with respect to employer or employee desires an immediate exit from the organization.
“This arrangement would attract the provisions of Section 66E (e) of the Finance Act 1994, whereby agreement by an entity to the obligation to refrain from an Act or to tolerate an Act or a situation, or to do not act, would constitute taxable service. The company has tolerated the act of immediate quitting from service, by the employees and such agreement/toleration results in the rendition of a taxable service.
Meanwhile, Guidance Note date June 20, 2012, by then Central Board of Excise and Custom or CBEC (now known as Central Board of Indirect Taxes and Custom or CBIC) made it clear that Provision of service by an employee to the employer is outside the ambit of service. Also, it replied in negative when asked would amounts received by an employee from the employer on premature termination of contract of employment be chargeable to service tax.
The court said,“The definition in clause (e) of Section 66E is not attracted to the scenario, the employer has not ‘tolerated’ any act of the employee but has permitted a sudden exit upon being compensated by the employee in this regard”.
The Court also held that “In case of recovery of notice pay, an employer does not ‘tolerate’ any act of the employee but permits a sudden exit upon being compensated and thereby ruled that such recoveries are not eligible to service tax”.
Madras high court ruled that recovery of notice period pay will not be subjected to services tax.
GST Council has not came out with any clarification yet with this regard.