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J42 GST LAW TIMES [ Vol. 35
employees without serving the notice period and such agreement/toleration re-
sults in the rendition of a taxable service.
High Courts’ decision
As per Service Tax Education Guide issued by the C.B.I. & C., a situation
where amounts have been received by an employee from the employer by reason
of premature termination of contract of employment, and the taxability thereof,
the Board has answered in the negative, pointing out that such amounts would
not be related to the rendition of service.
Present case which is a contra situation where employee pays to the em-
ployer, the employer cannot be said to have rendered any service per se much
less a taxable service and has merely facilitated the exit of the employee upon
imposition of a cost upon him for the sudden exit.
Provisions of Section 66E(e) of Finance Act, 1994 is not attracted to the
present scenario as, in 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.
Though normally, a contract of employment qua an employer and em-
ployee has to be read as a whole. There are situations within a contract that may
constitute rendition of service such as breach of a stipulation of non-compete.
However, amount received for non-serving of notice period does not give rise to
the rendition of service either by the employer or the employee. Accordingly,
Service Tax is not applicable on amount received for non-serving of notice period
i.e. notice pay recovery.
Another recent judgment from CESTAT Allahabad
In case of HCL Learning Limited Final Order No. 71950/2019, dated 25th
November, 2019, division Bench of Allahabad Tribunal has also held that amount
received towards Notice Pay Recovery is out of the salary already paid to the
employee. Further, salary is not covered by the provisions of Service Tax. Ac-
cordingly, Service Tax demand on Notice Pay Recovery is not sustainable.
Conclusion
In view of the above two judgments, contention of the department that
notice pay recovery falls under declared service as per Section 66E(e) of Finance
Act, 1994 and is exigible to Service Tax, is not sustainable. In past the department
has issued numerous show cause notices to the assessees demanding Service Tax
on the notice pay recovery. The assessees can rely on the above discussed judg-
ments in their defence.
Impact under GST
It may be noted that various provisions of GST law which are related to
levy of GST on service transactions are pari materia to provisions of erstwhile Ser-
vice Tax Law. Clause 5(e) of Schedule II of CGST Act, 2017 provides that follow-
ing activity shall be treated as supply of service :
(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a
situation, or to do an act; and
Clause 5(e) of Schedule II of CGST Act, 2017 is pari materia to Section
66E(e) of Finance Act, 1994. Therefore, the above discussed judgments are equal-
ly applicable to GST demand on Notice Pay Recovery.
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