Notice Pay & Hotel Cancellation Charges Not Taxable as Declared Service: CESTAT Delhi

Lalit Mumbai Vs Commissioner of CGST & Central Excise-Delhi East (CESTAT Delhi)

Summary: CESTAT Delhi allowed three appeals of Lalit Mumbai and set aside Service Tax demands concerning two distinct categories of receipts—notice pay recovered from outgoing employees for failure to serve the agreed notice period and amounts retained by the hotel when customers cancelled room bookings or failed to show up. In Appeal No. ST/51668/2019, the Department treated notice-period recovery as consideration for tolerating premature exit of employees and proposed Service Tax of Rs. 2,95,465/- under Section 66E(e) of the Finance Act, 1994.

In Appeals Nos. ST/52265/2019 and ST/52266/2019, the dispute concerned advance amounts retained as cancellation/no-show or room-retention charges, which the Department similarly treated as consideration for a declared service. On notice pay, the Tribunal followed the principle that employment contracts are entered into for employment and performance of duties, not for premature resignation, and compensation recovered when an employee leaves without serving the stipulated notice period is not consideration for any service. It relied particularly on Balaji Medical & Diagnostic Research Centre, Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. and GE T&D India Ltd. On cancellation/no-show charges, the Tribunal followed Shiv Vilas Resort and Lemon Tree Hotel, holding that customers pay for hotel accommodation and not for an agreement to tolerate cancellation or non-appearance.

A forfeiture clause merely safeguards the hotel’s commercial interest and does not transform the retained amount into consideration for a separate declared service. The Tribunal observed that there was neither an express nor implied contract for non-appearance and that Service Tax had already been discharged on the accommodation service. Finding both issues settled in favour of the assessee and no longer res integra, CESTAT also observed that the adjudicating authorities had failed to follow judicial protocol by going against the settled decisions. The impugned order was set aside and all three appeals were allowed. :chatgpt-content-reference{index=”0″} :chatgpt-content-reference{index=”1″}

Cases Discussed

• GE T & D India Ltd. V. Deputy Commissioner of Central Excise, Chennai, 2020 (1) TMI 1096 – Madras High Court — Relied upon for the principle that notice pay in lieu of premature termination does not result in rendition of service either by the employer or employee.
• Manappuram Finance Ltd. V. Assistant Commissioner of Central Tax & Excise, Thrissur, 2023 (69) GSTL 141 (Ker.) — Cited by the appellant on non-taxability of notice-pay recovery.
• KJS Cement Ltd. V. Commissioner of CGST, Central Excise & Customs, Jabalpur (MP), 2023 (12) TMI 903 – CESTAT New Delhi — Relied upon on notice-pay recovery; the Departmental Representative acknowledged that the notice-pay issue stood covered in favour of the appellant.
• Balaji Medical & Diagnostic Research Centre V. Principal Commissioner, CGST (East Delhi), New Delhi, 2023 (12) TMI 748 – CESTAT New Delhi — Followed on the proposition that compensation arising from premature termination of employment is not consideration for a service.
• Rajasthan Rajya Vidhyut Prasaran Nigam Limited V. Commissioner, CGST, Customs & Central Excise, Jodhpur-1, 2022 (1) TMI 909 – CESTAT New Delhi — Relied upon for holding that notice-period compensation incorporated in an employment contract is not the purpose of the contract and does not constitute consideration for a service.
• Shiv Vilas Resorts (P) Ltd. V. The Commissioner of Central GST and Central Excise, Jaipur, 2023 (12) TMI 1006 – CESTAT New Delhi — Followed for holding that hotel no-show charges are not consideration for a declared service under Section 66E(e).
• Lemon Tree Hotel V. Commissioner, CGST, CE & CU, 2019 (7) TMI 767 – CESTAT New Delhi — Followed for holding that amounts retained upon cancellation of hotel bookings do not attract Service Tax under Section 66E(e).
• Jubilant Motor Works (South) Pvt. Ltd. V. the Commissioner of GST & CE, Chennai, 2024 (2) TMI 819 – CESTAT Chennai — Cited by the appellant in support of non-taxability of amounts retained on cancellation.
• South Eastern Coalfields Ltd. V. Commissioner of Central Excise and Service Tax, 2020 (12) TMI 912 – CESTAT New Delhi — Relied upon on the distinction between contractual compensation/penalty and consideration for tolerating an act.
• Commissioner of Central Excise and Service Tax V. South Eastern Coalfields Ltd., 2023 (8) TMI 606 – SC Order — Cited by the appellant in support of its contention regarding penal/compensatory recoveries.
• K.N. Food Industries Pvt. Ltd. V. Commissioner of CGST & CE, Kanpur, 2020 (1) TMI 6 – CESTAT Allahabad — Cited for the proposition that compensatory or penal recoveries do not become consideration under Section 66E(e) merely because they arise under a contract.
• Commissioner of Service Tax, Chennai v. Repco Home Finance Ltd., 2020 (7) TMI 472 – CESTAT Chennai — Cited in support of the distinction between contractual conditions and consideration for a taxable service.
• Intas Pharmaceuticals, 2021 – TIOL – 367 – CESTAT – AHM — Referred to as following GE T&D India Ltd. on notice-pay recovery.
• State Street Syntel Services Pvt. Ltd., 2021 – TIOL – 152 – CESTAT – MUM — Referred to as following GE T&D India Ltd. on notice-pay recovery.
• Shri Ram Pistons and Rings Ltd., 2020 (42) GSTL 79 (Tri. – All) — Referred to as following the principle governing non-taxability of employment-related recovery.
• HCL Learning Ltd., 2019 – TIOL – 3545 – CESTAT – All — Referred to as another decision following GE T&D India Ltd.

FULL TEXT OF THE CESTAT DELHI ORDER

Present order disposes of 3 appeals pertaining to the same appellant and arising out of the common order-in-Appeal bearing No. 28-31/2019 dated 17.05.2019. The details of the appeals are as follows:-

2. The appellant herein is registered with Service tax Commissionerate and is engaged in the business of providing restaurant services. During the course of audit for the period as mentioned in the above table it was observed in Appeal No.51668/2019 that the appellant has generated income on account of “other income- notice period” during the said period. However, has not discharged the service tax on the notice pay received from the employee. The income as recorded is of Rs. 2,32,681/- during the period 01.07.2012 and Rs.13,90,210/- during the financial year 2014-15 under the hear “other income Notice period” which is the total amount recovered from employees who ceases to be in employment with them.

3. Department formed an opinion that in terms of section 66B of Finance Act, Service tax is leviable on the value of all services other than those specified in the negative list. Further as per section 65B (44) of Finance Act 1994 read with section 66(E) of the Act, sub- cause (e) thereof the act of agreeing to the obligation to refrain from an act, all to tolerate an act or a situation, or to do an act is a declared service. Since the employee had left the service with the appellant without serving the stipulated service period as mentioned in the employment contract, the activity is of toleration on part of the assessee i.e. the declared service. The appellant was liable to pay tax. According the service tax amounting to Rs.295465 alongwith the interest and penalty was proposed to be recovered from appellant in Appeal No. 51668 of 2019 vide Show Cause No.03/2016 – 17 dated 28.06.2016.

4. In Appeal No. 52265/2019 the audit for the period as mentioned above was conducted by internal audit team of Central Excise Audit Commissionerate, Jaipur it was found that the appellant has retained the cancellation charges, while providing the services under the category of short term accommodation for which they were booking the rooms and were charging consideration as advances from their customers in cases were customer could not avail those services and cancel the booking, the said advance amount was retained by the appellant. The amount retained was alleged to be a consideration for rendering the declared service i.e. the act of agreeing to the obligation to refrain from an act, all to tolerate an act or a situation, or to do an act is a declared service as defined under section 66E (e) of Finance Act, 1994. The whole amount so retained of Rs.22,68,542/- was alleged liable to service tax. The appellant had discharged the tax liability on 60% of the said amount only. Resultantly, the differential service tax amounting to Rs.1,12,157/- + Rs.1,70,372/- = Rs.2,82,529/- was proposed to be recovered from the appellant along with the amount of Cenvat credit amounting to Rs.65,980/- was proposed to be recovered vide Show Cause Notice No. 1305/2015 / 842 dated 21.04.2016.

5. In Appeal No. 52266 during the audit for the period as mentioned in the above table, the appellant was found to have generated income on account of “room charge retention” without discharging the service tax liability thereupon. The income of Rs.34,55,403/- during the period 01.07.2012 to 31.03.2013, Rs.21,72,925/- during the period 2013-14 and Rs.35,42,118/- during the financial year 20.04.2015 under the head “room charge- retention”. Similar to the allegation as the one in appeal No.52265 i.e. alleging the aforesaid amount to have been received for rendering the declared service that the service tax amounting to Rs.4,53,387/- was proposed to be recovered vide Show Cause Notice No.06/2016- 17 dated 19.07.2016. In three of these Show Cause Notices, the proposal therein were confirmed by the Original Adjudicating Authority vide orders as mentioned in the table above. The appeals against the said order have also been rejected. Being aggrieved, the appellant is before this Tribunal.

6. We have heard Mr.Kunal Agarwal, ld. Counsel for the appellant and Mr.Shashank Yadav, ld. Authorised Representative for the Department.

7. Ld. Counsel for the appellant has submitted that the issue involved in appeal No. 51668 / 2019 is Demand of service tax on the “Notice pay amount” which was collected from the outgoing/exiting employees for non-observance of pre-agreed notice period and in remaining 2 appeals i.e. bearing No. ST/52265/2019 & ST/52266/2019 is Demand of service tax under Section 66E (e) of the Act on the advance amounts which were forfeited on account of cancellation of booking / not show up by customer.

8. It is submitted that both these issues stand already decided. Ld. Counsel has relied upon the following decisions with respect to the issue of tax liability on the amount collected as “notice pay” from the employees on non-observance of the agreed notice period holding that the amount is not towards the provision of any service and hence not susceptible to Service Tax:-

1. GE T & D India Ltd. V. Deputy Commissioner of Central Excise, Chennai 2020 (1) TMI 1096-Madras High Court.

2. Manappuram Finance Ltd. V. Assistant Commissioner of Central Tax & Excise, Thrissur – 2023 (69) GSTL 141 (Ker.)

3. GE T & D India Ltd. V. Deputy Commissioner of Central Excise, Chennai – 2019 (12) TMI 1566-Madras High Court.

4. KJS Cement Ltd. V. Commissioner of CGST, Central Excise & Customs, Jabalpur (MP) – 2023 (12) TMI 903-CESTAT New Delhi

5. Balaji Medical & Diagnostic Research Centre V. Principal Commissioner, CGST (East Delhi), New Delhi – 2023 (12) TMI 748- CESTAT New Delhi

6. Rajasthan Rajya Vidhyut Prasaran Nigam Limited V. Commissioner, CGST, Customs & Central Excise, Jodhpur-1 – 2022 (1) TMI 909- CESTAT New Delhi

9. Ld. Counsel has relied upon the case laws in the cases of Shiv Vilas Resorts (P) Ltd. V. The Commissioner of Central GST and Central Excise, Jaipur – 2023 (12) TMI 1006 – CESTAT New Delhi, Lemon Tree Hotel V. Commissioner, CGST, CE & CU 2019 (7) TMI 767- CESTAT New Delhi & Jubilant Motor Works (South) Pvt. Ltd. V. the Commissioner of GST & CE, Chennai – 2024 (2) TMI 819-CESTAT Chennai to submit that the issue about amount collected as “retention / cancellation charges” by way of forfeiter of advance amounts from the customers on account of cancellation of booking is also not towards the provision of any service. Hence no serviced tax liability arises.

10. It is submitted that these are merely the penal charges. Hence service tax demand has wrongly been confirmed. The amounts have been paid in furtherance of the conditions of the contract. For that reason also those cannot be taxed. Ld. Counsel has relied upon the following case laws:-

1. South Eastern Coalfields Ltd. V. Commissioner of Central Excise and Service Tax, 2020 (12) TMI 912-CESTAT New Delhi

2. Commissioner of Central Excise and Service Tax V. South Eastern Coalfields Ltd. 2023 (8) TMI 606-SC Order

3. K.N. Food Industries Pvt. Ltd. V. Commissioner of CGST & CE, Kanpur 2020 (1) TMI 6-CESTAT Allahabad

4. Commissioner of Service Tax, Chennai v. Repco Home Finance Ltd. -2020 (7) TMI 472-CESTAT Chennai.

11. Ld. Departmental Representative has acknowledged that the issue involved in Appeal No.51668 about “notice pay” stands already covered in favour of the appellant by the decision of this Tribunal in Service Tax Appeal No.51642 / 2018 dated 31.01.2019, in the matter of KJS Cement Ltd. vs. Commissioner of CGST, Central Excise and Customs, Jabalpur. It is also acknowledged fairly by ld. Departmental Representative that the issue covered in remaining two appeals about service tax liability on room charge retention/ cancellation charges also stands decided by this Tribunal in Service Tax Appeal No.52200/2018-SM in the matter of Lemon Tree Hotel vs. Commissioner, Goods & Service Tax, Central Excise & Customs.

12. We have perused the decisions as relied upon by the ld. Counsel and acknowledged by ld. Departmental Representative and observe that in Balajee Medical Diagnostics (Supra) it has been held as follows:-

“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 also clarifies the following issues in the manner below:

“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 of Madras has, in GE T&D India Ltd. – 2019 (12) TMI – 1566 – Madras High Court 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. GE T&D India Ltd. was followed in Intas Pharmaceuticals 2021 – TIOL – 367 – CESTAT – AHM, State Street Syntel Services Pvt. Ltd.- 2021 – TIOL – 152 – CESTAT – MUM., Shri Ram Pistons and Rings Ltd. – 2020 (42) GSTL 79 (Tri. – All) and HCL Learning Ltd. – 2019 – TIOL – 3545 – CESTAT – All. Hence, we have no reason to differ from these findings.

13. With respect to remaining two appeals, we have perused the decision of this Tribunal in Shiv Vilas Resort (supra) wherein it is held as follows:-

“13. The amount i.e. „no show charges‟ are alleged as a consideration for rendering declared service. Declared service is defined under Section 66 E (e) as the service which is agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. There has, therefore, to be a flow of consideration from one person to another when one person agrees to the obligation to refrain from an act, or to tolerate an act, or a situation, or to do an act. In other words, the agreement should not only specify the activity to be carried out by a person for another person but should specify the:

(i) consideration for agreeing to the obligation to refrain from an act; or

(ii) consideration for agreeing to tolerate an act or a situation; or

(iii) consideration to do an act.

Thus, a service conceived in an agreement where one person, for a consideration, agrees to an obligation to refrain from an act, would be a „declared service‟ under section 66E(e) read with section 65B(44) and would be taxable under section 68 at the rate specified in section 66B. Likewise, there can be services conceived in agreements in relation to the other two activities referred to in section 66E(e).

14. It is trite that an agreement has to be read as a whole so as to gather the intention of the parties. The intention of the appellant and the parties was for supply of hotel accommodation and for availing various types of associated services. The consideration contemplated was for such supply of said service. The intention of the parties certainly was not for flouting the terms of the agreement. The forfeiture clauses are in the nature of providing a safeguard to the commercial interest of the appellant and it cannot, by any stretch of imagination, be said that recovering any sum by invoking the penalty clauses is the reason behind the execution of the contract for an agreed consideration. It is not the intention of the appellant to impose any penalty upon the other party nor is it the intention of the other party to get penalized.

15. It also needs to be noted that section 65B(44) defines “service” to mean any activity carried out by a person for another for consideration. Explanation (a) to section 67 provides that “consideration” includes any amount that is payable for the taxable services provided or to be provided. The recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se, since neither the appellant is carrying on any activity to receive compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same cannot be said to be towards toleration of the defaulting party. The expectation of the appellant is that the other party complies with the terms of the contract and a penalty is imposed only if there is non-compliance.

16. In the present case admittedly there is no separate fee or charges recovered by the appellant from the customers/ recipients of hotel accommodation service, for not being appearing to attend the said service. There was no express nor implied contract for non-appearance for availment of accommodation service between the parties. The consideration was paid by the recipient only for accommodation service on which the service tax liability was duly discharged. This issue about forfeiture of the amount received by a hotel from a customer on cancellation of the booking whether to be liable to pay service tax under section 66 E (e) has already been dealt with by this Tribunal in the case of Lemon Tree Hotel (supra), South Eastern Coalfields Ltd. (supra) the Tribunal has held that the retention of amount on cancellation would not attract service tax under 66E (e). The relevant portion of the decision reads as follows:-

“So far as the first issue is concerned, the appellant, in the course of their business of running a hotel, offers advance booking to its customers, on payment of rent or deposit. Sometimes in the event of cancellation or of no show i.e. if the guest does not come for stay, the appellants retain the full or part of the amount towards cancellation charges. It is admitted that the appellant have paid service tax under Accommodation Services as and when they receive advance, availing the permissible abated value. It is the case of the Revenue that upon cancellation by the customers, the gross amount received by the appellant qualifies the receipt under Section 66E(e).

Ld. Commissioner (Appeals) in confirming the demand under this head has observed that retention of such cancellation charges is not against the provisions of intended services but for not availing the said services by the customers, which the appellant has tolerated. Having considered the rival contentions, I find that the aforementioned observation of the Commissioner (Appeals) are erroneous and have no legs to stand. Admittedly, the customers pay an amount to the appellant in order to avail the hotel accommodation services, and not for agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and chargeable on full value and not on abated value. The amount retained by the appellant is for, as they have kept their services available for the accommodation, and if in any case, the customers could not avail the same, thus, under the terms of the contract, they are entitled to retain the whole amount or part of it. Accordingly, I hold that the retention amount (on cancellation made) by the appellant does not undergo a change after receipt. Accordingly, I hold that no service tax is attracted under the provisions of Section 66E(e) of the Finance Act. Accordingly, this ground is allowed in favour of the appellant.”

17. The facts of the present case are squarely covered under said decisions. Hence, we hold that the adjudicating authority below has wrongly held the „no show charges‟ as a consideration for providing declared service. In the light of this discussion the second issue as is framed above stands decided in favour of the appellant.”

14. We find no reason to differ from these findings. Since the issue stands already decided in favour of assessee and has attained finality, it is no more res-integra. The adjudicating authorities are held to have failed to follow the judicial protocol while going against the said decisions.

15. In the light of entire above discussion, we hereby set aside the impugned order. Consequent thereto all the appeals stand allowed.

[Pronounced in the open court]