Biocon Ltd. Vs Commissioner of Central Tax (CESTAT Bangalore)
Summary: CESTAT Bangalore held that notice period pay/bond enforcement pay recovered by Biocon Ltd. from employees who quit employment or resigned without serving the stipulated notice period was not consideration for a service of “tolerating an act” and was therefore not liable to Service Tax as a declared service under Section 66E(e) of the Finance Act, 1994. The appellant, registered for various taxable services, employed a large number of employees whose employment agreements prescribed a notice period and entitled the appellant to recover an amount in case of non-compliance. During audit, the Department found that Service Tax had not been paid on such recoveries for July 2012 to March 2015, resulting in show cause proceedings, confirmation of demands, interest and penalties, which were substantially upheld by the Commissioner (Appeals).
The appellant contended that no service was provided to employees and that Section 66E(e) required a specific agreement to tolerate an act coupled with consideration for that activity. Reliance was placed on Circular No. 214/1/2023-Service Tax dated 28.02.2023, which clarified that the agreement must specifically contemplate the activity and there must be a flow of consideration for it. The appellant also relied on Circular No. 178/10/2022-GST dated 03.08.2022, under which amounts recovered from employees leaving before the minimum agreed period are penalties intended to discourage premature departure rather than consideration for tolerating it. CESTAT found the issue settled by Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. and the applicable CBIC circular.
Rajasthan Rajya Vidhyut Prasaran Nigam, following the Madras High Court ruling in GE T&D India Ltd. Vs Deputy Commissioner of Central Excise, had held that compensation for failure to comply with an employment contract is not consideration for a service and that notice pay does not result in rendition of service by either employer or employee. CESTAT accordingly held that amounts received from employees quitting before completing the required service period could not be regarded as consideration for any service and were not liable to Service Tax under Section 66E(e). Both appeals were allowed with consequential relief in accordance with law.
Cases Discussed
- Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. Vs Commissioner (CESTAT Delhi), 2022 (1) TMI 909 — Followed for holding that compensation recovered for failure to comply with the notice-period requirement is not consideration for a service under the employment contract and is not taxable under Section 66E(e).
- GE T&D India Ltd. Vs Deputy Commissioner of Central Excise, Chennai (Madras High Court), 2020 (1) TMI 1096 — Followed through Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. for holding that notice pay in lieu of termination does not result in rendition of service either by the employer or employee.
- XL Health Corporation India Pvt. Ltd. Vs Commissioner of Central Tax, Bengaluru South Commissionerate (CESTAT Bangalore), 2022 (5) TMI 427 — Relied upon by the appellant as a Tribunal decision covering the taxability of notice-pay recovery under an employment contract.
- Kusum Ingots & Alloys Ltd. Vs Union of India & Anr. (Supreme Court), (2004) 6 SCC 254 — Relied upon by the appellant in support of its contention concerning applicability of the subsequent circular where the relevant statutory provisions are pari materia.
- State of Bihar Vs S.K. Roy (Supreme Court), 1966 (4) TMI 72 — Relied upon by the appellant in support of its contention concerning identically worded/pari materia statutory provisions.
FULL TEXT OF THE CESTAT BANGALORE ORDER
The issue in the present appeal is whether the notice period pay/bond enforcement pay received by the appellant from the employees, who quit employment or resign from service without serving the stipulated notice period amounts to consideration received for service of tolerating the act of employees and attracts service tax liability under Section 66E(e) of Finance Act, 1994.
2. M/s Biocon, appellant is registered under the category of ‘Scientific and Technical consultancy’, ‘Renting of Immovable Property’, ‘Maintenance and Repair Services’ and ‘Management or Business Consultant Services’. The appellant employs large number of employees for the provision of the above service and as per the agreement, a notice period is specified before the employee could leave the employment and non-compliance of this entitles the appellant to recover an amount from the employees. During Audit, it is found that for the period from July 2012 to March 2015, appellant has not paid service Tax on such amounts collected from employees. Thereafter, show cause notice was issued demanding service tax with interest and invoked the penal provisions under various provisions of law. The Adjudication Authority confirmed the demands and imposed penalties.
3. Aggrieved by the said orders, appeals were filed before the Commissioner (Appeals), who in the impugned order in Appeal No. ST/20116/2020 confirmed the demand along with interest and modified the penalty imposed on the appellant. Further, the Commissioner (Appeals) in the impugned order in Appeal No. ST/20548/2019 confirmed the demand along with interest and penalty. Aggrieved by impugned orders, the present appeals are filed. Since the issue in both the appeals is similar both the appeals are taken up together and are disposed vide this Order.
4. In the Appeal, the appellant submits that there is no service provided by the appellant to the employees and there is no specific agreement for tolerating any act of the employees to demand service tax from the appellant. The Learned Counsel also submits that Section 66E(e) specifically requires that there has to be an “agreement” to tolerate an act. In this regard, reference is made to Circular No. 214/1/2023-Service Tax dated 28.02.2023, wherein the following clarification was issued:
6. In view of above, it is clarified that the activities contemplated under section 66E(e), i.e. when one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act, are the activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity. Field formations are advised that while taxability in each case shall depend on facts of the case, the guidelines discussed above and jurisprudence that has evolved over time, may be followed in determining whether service tax on an activity or transaction needs to be levied treating it as service by way of agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. Contents of Circular No. 178/10/2022-GST, dated 3rd August, 2022, may also be referred to in this regard.
5. The Learned Counsel also drew our attention to the decision of the Tribunal in the matter of M/s. Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. Vs. Commissioner, 2022 (1) TMI 909–CESTAT NEW DELHI, wherein following the judgment of GE T & D India Ltd. Vs. Deputy Commissioner of Central Excise, Chennai – 2020 (1) TMI 1096 – MADRAS HIGH COURT, it waws held that;
“19. In view of our finding that compensation for failure under a cannot is NOT consideration for service under the contract and also following the law laid down by Madras High Court in GE T&D that notice pay, in lieu of termination, however, does not give rise to the rendition of service either by the employer or the employee, the impugned order upholding confirmation of a demand of service tax on the notice pay received/recovered by the appellant from its employees for premature resignation cannot be sustained and needs to be set aside.
20. In view of the above, the appeal is allowed and the impugned order is set aside”.
6. The Learned Counsel also drew our attention to the Circular No. 178/10/2022-GST dated 03.08.2022, where it is clarified that amounts recovered from employees, who leave before minimum agreed period are not recovered as consideration for service of tolerating the act of premature quitting but as penalties for dissuading employees from doing such an act. It is further submitted that although the above Circular pertains to the GST regime, it is equally applicable to the Service Tax regime as the provisions under consideration i.e. Section 66E(e) of the Finance Act and the Entry 5(e) of Schedule II of the CGST, Act are identically worded and are pari-materia. In this regard, learned counsel for the Appellant placed reliance on the following decisions:
i. Kusum Ingots & Alloys Ltd. Vs. Union of India & Anr, (2004) 6 SCC 254,
ii. State of Bihar Vs. S.K. Roy, 1966 (4) TMI 72- SUPREME COURT
7. Learned Counsel further submits that the issue is squarely covered by the following decisions of the Tribunal;
i. GE T&D India ltd. Vs. Deputy Commr. of Central Excise, Chennai-2020 (1) TMI 1096-Madras High Court,
ii. M/s. XL Health Corporation India Pvt. Ltd. Vs. Commissioner of Central Tax, Bengaluru South Commissionerate, 2022 (5) TMI 427 – CESTAT, BANGALORE.
8. Learned Authorised Representative for the Revenue reiterated the findings and further submits that there is a contract between the appellant and its employees at the time of the employment that if the employee terminates the employment certain consideration has to be paid by the employee to the employer. Thus, the activities are passive in nature, on a harmonious reading of section 65(b) and 66E(e) of the Finance Act, 1994 make it clear that nature of service can be both active and passive.
9. Heard both sides, we find that the issue is settled as per the Circular No. 214/1/2023-Service Tax dated 28.02.2023 and the decision in the matter of M/s. Rajasthan Rajya Vidhyut Prasaran Nigam Ltd (Supra). Considering the above facts, the amounts received by the appellant from the employees, who quit employment before the period of service without complying with the condition cannot be considered for a service and hence not liable for service tax as a declared service under clause (e) of Section 66E of the Finance Act, 1994. Accordingly, the appeals are allowed with consequential relief if any, in accordance with the law.
(Order Pronounced in Open court on 14.06.2024)
