Service Tax is not applicable on amounts received by the Employer from an outgoing employee in lieu of not serving the notice period: Madras High Court
by ReinHeads Team | Jan 30, 2020
| Facts |
- ·GET & D India Limited (‘the Employer’) has executed employment contract with employees stipulating a notice period from 2-3 months, prior to quitting from employment
- An option is provided to the employees that if they are not in a position to stay and serve out the notice period, in lieu of the same, the employee will be required to pay the equivalent salary for the period for which notice period was not served
- The Employer received amount from its outgoing employees in lieu of not serving the stipulated notice period as per the terms of the employment contract
- The Department confirmed Service tax demand against the Employer on the basis that the aforesaid amount received would attract Service tax as it is deemed to be a service of ‘facilitation of termination of employment’
- Aggrieved by the said Order, the Employer filed a Writ Petition before the Hon’ble High Court of Judicature at Madras (‘High Court’)
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| Issue |
- Whether the amount received by the Employer from an employee for premature termination of employment would attract Service tax?
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| Ruling |
- ·Section 66E(e) of Chapter V of the Finance Act, 1994 provides for taxability of declared service i.e., ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’
- The Employer has not rendered any taxable service to the employee and has merely facilitated the exit of the employee by imposition of a cost upon him for the sudden exit
- Section 66E(e) of the Act is not attracted as the Employer has not ‘tolerated’ any act of the employee but has permitted the sudden exit upon being compensated by the employee
- Notice pay in lieu of sudden termination does not give rise to rendition of service either by the Employer or the employee
- Thus, the Hon’ble High Court held that amount received by the Employer from an employee in lieu of not serving the stipulated notice period, shall not be subject to Service tax
- Separately, the Hon’ble High Court held that the plea of alternate remedy (as raised by the Respondent) is not sustainable since the matter involves an interpretation of statutory provision in light of undisputed facts
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