Balaji Medical & Diagnostic Research Centre Vs Principal Commissioner (CESTAT Delhi)
Summary: CESTAT Delhi allowed the appeal of Balaji Medical & Diagnostic Research Centre and set aside the Service Tax demand of Rs. 6,29,329/- confirmed on notice pay recovered from employees who prematurely terminated their employment. Two show cause notices had raised demands on revenue share deducted from consulting doctors’ fees and on notice pay recoveries. While the adjudicating authority dropped the major demand of Rs. 4,59,47,462/- relating to the revenue-sharing arrangement, it confirmed Rs. 6,29,329/- comprising Rs. 3,38,472/- for 2010-11 to 2014-15 and Rs. 2,90,857/- for 2015-16 in respect of notice pay.
The Tribunal found that the surviving issue was already settled by Rajasthan Rajya Vidhyut Prasaran Nigam Ltd., which explained that an employment contract is entered into for employment and performance of duties, not for premature resignation or termination. Notice-period compensation incorporated in the employment contract therefore does not become consideration for a service merely because it is contractually stipulated. The Tribunal also relied upon GE T&D India Ltd., where the Madras High Court held that notice pay in lieu of sudden termination does not result in rendition of service either by the employer or employee.
That principle had also been followed in Intas Pharmaceuticals, State Street Syntel Services Pvt. Ltd., Shriram Pistons & Rings Ltd. and HCL Learning Ltd. Finding the issue identical and seeing no reason to depart from those rulings, CESTAT held that the notice-pay demand could not survive, set aside the impugned order and allowed the appeal.
Cases Discussed
- M/s Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. versus Commissioner of Central Goods and Service Tax, Customs and Central Excise, Jodhpur I — CESTAT followed the ruling that notice pay recovered from employees for premature resignation is compensation under the employment contract and not consideration for a service under Section 66E(e).
- GE T&D India Ltd. — Madras High Court held that notice pay in lieu of sudden termination does not give rise to rendition of service either by the employer or the employee.
- Intas Pharmaceuticals — Followed GE T&D India Ltd. on the non-taxability of notice-pay recovery.
- State Street Syntel Services Pvt. Ltd. — Followed GE T&D India Ltd. on the notice-pay issue.
- Shri Ram Pistons and Rings Ltd. — Followed the principle that recovery connected with premature exit from employment does not constitute taxable consideration.
- HCL Learning Ltd. — Cited as another decision following the principle governing notice-pay recovery.
FULL TEXT OF THE CESTAT DELHI ORDER
In the present appeal the order-in-original No. 01- 02/PK/GST/DE/2018-19 dated 07/04/2018 has been assailed. The facts, in brief, relevant for the present adjudication are as follows:
The appellant are registered with the Service Tax Commissionerate, Delhi for providing several taxable services (medical services) through its hospital ”Max Super Speciality Hospital” located in Delhi NCR. During the audit of the records of the appellant various deficiencies and infractions were noticed as detailed in the show cause notice as follows:-
(i) Non payment of service tax on revenue share deducted by hospital from consulting Doctor‟s fee;
(ii) Fee for service plan;
(iii) Non payment of service tax on notice pay recovered from the ex-employee.
2. The order has adjudicated two show cause notices: (SCN) dated 19.04.2016 and 17.04.2018 proposing duty demand of Rs. 46,54,048/- for the period July 2012 to March 2016 on the following issues:
(a) Non payment of service tax on “Revenue Share” deducted by the Hospital from Consulting Doctor‟s fee under „Business Support Service‟ (Service Tax: Rs. 3,53,59,075/- for period 2010-11 to 2014-15 vide SCN dated 19.04.2016 + Rs. 1,09,66,554/- for period 2015-16 vide SCN dated 17.04.2018 &
(b) Non-payment of Service tax on “Notice Pay” recovered from the ex-employees (Service Tax Rs. 3,38,472/- for period 2010-11 to 2014-15 vide SCN dated 19.04.2016 + Rs. 2,90,857/- for period 2015-16 vide SCN dated 17.04.2018.
3. Proportionate interest and appropriate penalties were also proposed vide both the said show cause notices. The Adjudicating Authority vide the aforesaid orders has dropped the major amount of demand i.e. for Rs. 4,59,47,462/- (Rs. 3,53,59,075 + Rs. 1,09,66,554), which was the amount received in respect of revenue sharing agreement, however, the demand for an amount of Rs. 6,29,329/- (Rs. 3,38,472 + Rs. 2,90,857) has been confirmed with respect to „notice pay‟ received by the appellant. Being aggrieved the appellant is before us.
3. We have heard Ms. Poorvi Asati, learned counsel for the appellant and Shri Manoj Kumar, learned Departmental Representative for the Revenue. Learned counsel for the appellant has mentioned that only issue in the present appeal is the demand of service tax on the amount of „notice pay‟ collected from the each going/exchanging employee. It is mentioned that issue has already been decided by this Tribunal and the Hon‟ble High Court of Madras wherein it has already been held that the pay amount received by the employee of their pre-mature resignation does not amount to the provision of service hence cannot be called as declared service under Section 66E (e) of the Finance Act. Learned counsel has also relied upon decision as well as GST Circular No. 178/10/2022-GST dated 03-Aug-2022.
4. While rebutting the submissions learned Departmental Representative has relied upon the findings in the order under challenge impressing upon no infirmity in the order. The appeal is prayed to be dismissed.
5. Having heard the rival contentions, pursuing the entire record and the decisions as well as the Circular relied upon by the learned counsel for the appellant, we observe that the only issue in the impugned order is the taxability about the amount as has been received by the employer from its employees at the time of pre-mature termination of the contract of the employment. The issues stand already decided by this Tribunal, Principal Bench vide order dated 14.01.2022 in Appeal No. 53020 of 2018 title as M/s Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. versus Commissioner of Central Goods and Service Tax, Customs and Central Excise, Jodhpur I, this Tribunal held as follows:-
“15. The present case deals with contracts of employment. Employment contracts are entered into with the expectation that the employer will continue to keep him employed for the period as agreed and that the employee will perform his duties diligently. They are not entered into so that the employer can remove the employer from service or so that the employee can resign and leave the service. However, often, for various reasons the employer may decide to terminate the services of the employee which puts the employee to inconvenience and he has to find another job. Conversely, the employee may decide to resign and leave the service which inconveniences the employer who will have to make alternative arrangements such as finding a substitute. A notice period on both sides is provided for so that the other party can make arrangements. If the employer decides to terminate the services without giving the required notice, the employment contract itself provides for a compensation to be paid. Similarly, if the employee resigns without notice, compensation is paid by the employee or recovered from his dues. Both the notice period and the compensation are incorporated in the employment contact itself but these are not the purpose of the contract. Consequently, any compensation paid is not a consideration for the contract.
16. Since the provision of section 66E(e) appears to have given rise to some confusion, the Central Board of Excise and Customs issued CBEC‟s guidance notes dated 20.06.2012 paragraph 2.9.3 clarifies 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 chargeable 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.”
17. Referring to the above clarification by the CBEC, High Court 1 of Madras has, in GE T&D India Ltd. held that notice pay, in lieu of sudden termination, does not give rise to the rendition of service either by the employer or the employee and allowed the writ petitions. Thus, the specific issue in this case is no longer res integra. 2 GE T&D India Ltd. was followed in Intas Pharmaceuticals, State 3 Street Syntel Services Pvt. Ltd., Shri Ram Pistons and Rings Ltd. 4 and HCL Learning Ltd.5
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”.
6. The issue involved in the present appeal is found to be exactly same which stands already decided in the above manner. We have no reason to differ with those findings. Resultantly, we set aside the order under challenge. As consequence thereof, the appeal is hereby allowed.
(Order dictated and pronounced in open court.)
Notes:
1 2019 (12) TMI – 1566 – Madras High Court
2 2021 – TIOL – 367 – CESTAT – AHM
3 2021 – TIOL – 152 – CESTAT – MUM.
4 2020 (42) GSTL 79 (Tri. – All)
5 2019 – TIOL – 3545 – CESTAT – All.T – All.
