C.S.T.-Service Tax – Ahmedabad vs Intas Pharmaceuticals

This appeal has been filed by Revenue against the order of Commissioner (Appeals) for dropping of demand of Service Tax.

Learned Authorised Representative relied on the arguments made in the Review Order. The arguments of the Review order are as follows:

A. The instant case revolves around the fact that the assessee has offered employment to their employees on the terms and conditions as decided

upon by both the parties. One of the condition to offering and accepting the employment is to continue in employment for the prescribed period and in

case of premature resignation or leaving the employment the employee would have to pay to the assessee the decided amount i.e. one month's pay. In

a nutshell, the contractual agreement to offering the employment is that the employee should not leave the employment before the prescribed period. It

is upon agreeing to this condition that the employment is offered. In case of breach of this condition by the employee, he would be required to pay one

month's salary to the employer which is penal in nature. Thus, the employee is under an obligation to complete the prescribed tenure in employment or

pay the decided amount towards breach of contract.

B. The above scheme of arrangement clearly indicates that both the parties have entered into a contractual agreement to abide by the terms and

conditions Further, the terms and conditions of the employment also indicate that the assessee has agreed to tolerate the act of breach of contract by

the employee Le. leaving the employment before the agreed upon period subject to payment of one month's pay which is in the nature of penal action

or damages towards breach of contract. Thus, the scheme of things clearly indicate that the assessee has agreed to tolerate the breach of contract by

the employee, if any, against receiving the consideration in the form of one month's pay of the employee. The employee has also agreed to pay such

amount in case of breach of contract. After making such agreement, the assessee has offered employment and the employee having agreed to such

conditions has accepted the employment. Thus, the element of agreeing to the obligation to tolerate the act of breach of contract of the employee

clearly exists in the scheme of arrangement.

C. In the instant case, the employee has breached the contract not to leave the employment before the agreed upon period and the assessee has

tolerated this act of breach of contract of the employee. Against the act of tolerating the breach of contract, the assessee has received consideration

in the form of one month's pay of the employee. Thus, the activity clearly falls within the ambit of declared services in terms of the provisions of Sec.

66E(e) of the Finance Act, 1994. Therefore, the assessee had correctly paid the service tax on such 'noticepay' amount received as consideration

towards tolerating the act of breach of contract by the employee. Resultantly no refund was admissible to the assessee in as much as the service tax

had been correctly paid by them.

D. The Commissioner (Appeals) has failed to appreciate the term 'declared service under Sec. 66E(e) of the Finance Act, 1994 in terms of the facts

of the case such as the contractual agreement between the two parties, the breach of contract by the employee and the payment made by the

employee, as penalty damages towards such breach of contract.

Learned Counsel for the appellant argued that Service Tax has been demanded on the amount received by the employer namely M/s Intas

Pharmaceuticals from its employees. The amount is recovered in lieu of the mandatory notice period prescribed in the employment contract from

employees quitting the job. He pointed out that when the employee intends to resign the employment contract requires him to give a notice of 2-3

months. However, if the employee wishes to quit without giving due notice to the employer, then as per the agreement, the employer is entitled to

recover a certain amount from the employee. Learned Counsel argued that the issue is no longer res integra and has been said to rest by Hon’ble

High Court of Madras in the case of GE T&D India Limited 2020 (35) G.S.T.L.89 (Mad). He has relied on other numerous case laws as well.

We have considered rival submissions. We find that the issue in hand is if Service Tax can be demanded on amount recovered by the employer

from the employee for granting waiver of mandatory notice period prescribed in the agreement. The issue has been settled by the Hon’ble High

Court of Madras in the case of GE T & D India Pvt. Ltd. The decision of The Hon’ble High Court deals with all the issues raised in the review

order. The Hon’ble High Court of Madras has held as follows:

“10. The provisions of Section 66E(e) appear to have given rise to some ambiguity, on this very issue, clarified by the Central Board of

Excise and Customs (C.B.E. & C.) in C.B.E. & C.s’ Guidance Notes dated 20-6-2012. At para 2.9.3 the Board states as follows :

2.9 Provision of service by an employee to the employer is outside the ambit of service.

2.9.3. Would amounts received by an employee from the employer on premature termination of contract of employment be chargable to

service tax?

No. Such amounts paid by the employer to the employee for premature termination of a contract of employment are treatable as amounts

paid in relation to services provided by the employee to the employer in the course of employment. Hence, amounts so paid would [not] be

chargeable to service tax. However any amount paid for not joining a competing business would be liable to be taxed being paid for

providing the service of forbearance to act.

The query raised relates to a contra situation, one, 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. Equally, so in my view, 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.

The definition in Clause (e) of Section 66E as extracted above is not attracted to the scenario before me as, in my considered view, 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 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 noncompete. Notice pay, in lieu of sudden termination

however, does not give rise to the rendition of service either by the employer or the employee.â€​

In view of the fact that the issue has been settled by the Hon’ble High Court of Madras, the appeal is dismissed.

(Pronounced in the open court on 25/06/2021)