In the Matter of: M/s Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. v. Commissioner of Central Goods and Services Tax, Customs and Central Excise, Jodhpur I [Service Tax Appeal Number 53020 of 2018]
Forum: Customs, Excise & Service Tax Appellate Tribunal, New Delhi ("CESTAT")
Order Delivered on: January 14, 2022
A. Factual Background:
The case, by way of appeal, was filed by M/s Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. ("Appellant") assailing the order dated June 19, 2018 ("Impugned Order") passed by the respondent, Commissioner of Customs (Appeals), Jodhpur ("Respondent") upholding the order dated December 14, 2016 passed by the Assistant Commissioner of Central Excise, Bikaner ("ACCE"). The aforesaid orders inter alia confirmed the demand of service tax along with interest and imposition of penalty on the amount which had been recovered by the Appellant from its employees on premature resignation, i.e., without giving the requisite notice period.
In the present case, the Service Tax Department, upon conducting an audit of the records of the Appellant, issued a show cause notice to the Appellant for not discharging service tax on the amount recovered from its employees on account of their premature resignation without serving the requisite notice period. The show cause notice demanded service tax amounting to INR 3,55,472/- (Rupees Three Lakhs Fifty Five Thousand Four Hundred and Seventy Two) along with interest and penalty under the Finance Act, 1994 ("Finance Act"). Subsequently, the ACCE confirmed the demand of service tax along with interest and penalty, which was further upheld by the Respondent under the Impugned Order.
The service tax for the relevant period was chargeable on all services under Section 66B of the Finance Act, other than those included in the negative list. Under the Finance Act, the term 'service' was inter alia defined to mean "any activity carried out by a person for another for consideration, includes a declared service..." and the term 'declared service' was defined to mean "any activity carried out by a person for another person for consideration and declared as such under section 66E". Section 66E(e) of the Finance Act included "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act".
In view of the aforesaid, the revenue department contended that the Appellant had tolerated its employees' resignation without serving the requisite notice period in return for a consideration and therefore, the amounts received or recovered from its employees were subject to service tax under Section 66E(e) of the Finance Act. The Appellant contended that it has neither rendered any service nor entered into any agreement to tolerate its employees leaving without serving notice and the amounts collected was compensation for the aforesaid acts of its employees not chargeable to service tax.
Issue: The issue before the CESTAT was whether the amount received or recovered by the Appellant from its employees for resigning from the service without giving the requisite notice is chargeable to service tax or not.
At the outset, the CESTAT noted that the terms 'service' and 'declared service' require the activity to be for 'consideration' and was of the opinion that the officers of the revenue department had confused compensation for consideration.
The CESTAT further elucidated on the concepts of consideration and compensation as follows:
- consideration is something received for performance under the contract while compensation is received, in the form of liquidated or unliquidated damages as the case may be, if the other party reneges or fails to perform as per the contract;
- consideration is the object of the contract and compensation is not;
- consideration is the result of successful performance of the contract while compensation is paid by the party frustrating the contract to the other;
- compensation is also paid, if the contract so provides, when one party performs under the contract but not within the conditions laid down, such as delays in performance etc.
Interestingly, the revenue department contended that liquidated damages (penalty for resigning without notice period in the present case) was there in the contract itself and it was agreed beforehand that if one of the parties' reneges or fails to perform, the other will tolerate the situation in return for the amount to be paid as decided in the contract. The aforesaid, the revenue department contended, was an agreement to tolerate a situation as envisaged in Section 66E(e) of the Finance Act. While refuting the aforesaid contention of the revenue department and referring to the interpretation clause of the Indian Contract Act, 1872, the CESTAT has held the following:
"12. ...Evidently, the promises have to be for performance under the contract and not for frustrating it. Consideration, correspondingly, is at the desire of the promisee. It must be something which the promisee desires and not something which he does not want. Each party to a contract desires the other to perform his part of the deal and not that the other party does not perform so that it can get a compensation. ... The fact that the quantum of penalty or compensation is not decided by a court of law but is pre-agreed and built into the contract for the service itself in the form of liquidated damages does not make it a consideration; it remains
Thus, the CESTAT denied the Respondent's contention and stated that what falls within the ambit of Section 66E(e) of the Finance Act are cases where the essence of the agreement is tolerating a situation or refraining from an act in return for a consideration. If the agreement is for something else and if one of the parties fails to perform as per the agreement and pays to the other a compensation as pre-decided in the agreement, it does not fall under the ambit of Section 66E(e) of the Finance Act.
The CESTAT also referred to the decision of the Hon'ble Madras High Court in Ge T & D India Limited v. Deputy Commissioner of Central Excise [W.P. Nos. 35728 to 35734 of 2016] wherein it held that no service tax is payable on notice pay in lieu of sudden termination, as it does not give rise to the rendition of service either by the employer or the employee. Furthermore, a similar view was also taken under the Goods and Services Tax Regime by Appellate Authority for Advance Ruling, Madhya Pradesh in M/S. Bharat Oman Refineries Limited [Advance Ruling No. MP/AAAR/07/2021] by stating that merely because the employer is being compensated does not mean that any services have been provided by him or that he has 'tolerated' any act of the employee for premature exit.
Taking note of the essence of contracts of employment as well as the inherent incorporation of notice period and compensation in lieu of non-service of notice periods, the Hon'ble CESTAT set aside the Impugned Order and held that notice period, along with the compensation are not the purpose of the contract and therefore, any compensation paid towards the same is not a consideration for the contract.
The interpretation of service tax authorities to charge service tax on notice pay recovery is incorrect as confirmed by the Hon'ble CESTAT's order and therefore no service tax is chargeable on the amount of notice pay recovered from employer in lieu of resignation by employees without serving the requisite notice and hence, will not attract the provisions of Section 66E(e) of the Finance Act.
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