Dear All,

This is in furtherance to the Tax Focus circulated in the appended e-mail pertaining to the Advance Ruling issued by the Authority for Advance Ruling, Gujarat (“the AAR”) in the case of M/s Amneal Pharmaceuticals Pvt. Ltd (‘the Appellant’). In this case, the AAR held that the Applicant is liable to pay GST @18% on recovery of Notice Pay from the employees who are leaving without completing the notice period (specified in the Appointment Letter).

Aggrieved by the ruling passed by the AAR, the Appellant filed an appeal before the Appellate Authority of Advance Ruling, Gujarat (“the AAAR”).

The members of the AAAR gave divergent opinions and made the following key observations:

1. GST is applicable on notice period recovery by the employer

• The condition provided in the appointment letter (‘the Contract’) stipulates that in case where employee does not serve the notice period, the Appellant agrees to tolerate such an act against the consideration received in the form of amount equivalent to notice period salary which would be treated as liquidated damages
• As per para 5(e) of Schedule II read with Section 7 of the Central Goods and Services Tax Act, 2017 (“the Act”), ‘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. Further, as per ‘scheme of classification of services’ annexed with the Notification No. 11/2017-Central Tax (Rate) dated 30 June 2017,‘Agreeing to tolerate an act’ is classified under service description under ‘other miscellaneous services’ with service code (tariff) as ‘999794’
• In light of same, services provided by the Appellant to the employee by way of tolerating non-performance or breach of the contract for not serving the stipulated notice period for which consideration in the form of liquidated damages is payable, is leviable to GST, unless it is otherwise specifically exempted from payment of GST. Further, no GST exemption is provided under the Act on the said activity

2. GST is not applicable on notice period recovery by the employer

• In order for any goods and services to be classified as supply of goods or services as per schedule II of the Act, the same must fulfil the conditions of Section 7(1) of the CGST Act.
• Notice pay recovery is not covered under the definition of supply as per Section 7(1) of the CGST Act on account of the following:
  • No agreement for transaction or performance of activity i.e. the essential purpose of the contract is for employment service and not for recovery of notice pay

• • Absence of service element i.e. ‘toleration of breach’ by the Appellant is not a voluntary act, the condition of breach indicated in the contract by no stretch of imagination can be inferred to mean as “toleration of an act”.
  • Absence of consideration i.e. in the context of the contract, notice pay recovery does not attain the character of a consideration for the very reason that it is not linked to any voluntary act of the Appellant
  • Transaction or activity is not in the course and furtherance of business

As members of the appellate authority are differing, section 101(3) of the CGST Act shall apply which prescribed that where members of the appellate authority differ on any point or points referred to in appeal or reference, no advance ruling can be issued in respect of the question under the appeal or reference