In re Amneal Pharmaceuticals Pvt. Ltd. (GST AAAR Gujarat)
Question: Whether the applicant is liable to pay GST on recovery of Notice Pay from the employees who are leaving the company without completing the notice period as specified in the Appointment Letter issued as per the contract entered between Employer and the Employee?”
Answer:
AAAR Member Ms. SEEMA ARORA held that Amneal Pharmaceuticals Private Limited is liable to pay Goods and Services Tax at applicable rate on the amount of notice pay (liquidated damages) received from the employees leaving the job of the appellant without completing the notice period as specified in the contract entered into (Appointment Letter) between the appellant and its employees, and reject the appeal filed by M/s. Amneal Pharmaceuticals Private Limited.
AAAR Member Shri. MILIND TORAWANE held that the appellant is not liable to pay Goods and Services Tax on recovery of notice pay from employees who leave the company without completing the notice period as specified in the Appointment Letter issued as per the contract entered between employer and employees.
As the members of appellate authority are differing, Section 101 (3) of CGST Act, 2017 shall apply. As Per section Section 101 (3) of CGST Act, 2017 Where the members of the Appellate Authority differ on any point or points referred to in appeal or reference, it shall be deemed that no advance ruling can be issued in respect of the question under the appeal or reference.
FULL TEXT OF THE ORDER OF APPELLATE AUTHORITY FOR ADVANCE RULING, GUJARAT
The appellant, M/s. Amneal Pharmaceuticals Pvt. Ltd. filed an application for advance ruling before the Gujarat Authority for Advance Ruling (herein after referred to as the ‘GAAR’), wherein it submitted that it enters into contract with the employees at the time of appointing any employee at their factory, by issuing ‘Appointment Letter’. One of the conditions mentioned in the ‘Appointment Letter’ is – “Your services can be terminated by giving three months ‘ notice or notice pay in lieu of notice period from either side.”. Thus, as per the said condition, either parties shall serve a three months’ notice, and if any employee doesn’t serve the notice period after tendering the resignation, then as per the contract (Appointment Letter) condition, company is entitled to recover the notice pay from the agreed portion of salary to compensate the loss to the appellant company. It further submitted that in case the employee resigns and leaves without serving the notice period, the company is deducting the notice pay amount for unserved notice period to cover the loss of company for immediate recruitment of new candidates and also to regularize the activities not handed over to upcoming employee. It was also submitted that the notice period amount recovered/paid from/by the employee/employer should not be under the purview of GST since it is an arrangement to compensate the loss to employer/employee as per contractual arrangement. In the above backdrop, it raised the following question for advance ruling –
” Whether the applicant is liable to pay GST on recovery of Notice Pay from the employees who are leaving the company without completing the notice period as specified in the Appointment Letter issued as per the contract entered between Employer and the Employee? “
2. The GAAR examined the aforesaid question and vide Advance Ruling No. GUJ/GAAR/R/51/2020 dated 30.07.2020 answered in affirmative i.e. it held that the appellant is liable to pay GST on recovery of notice pay from the employees.
3.1 Aggrieved by the aforesaid advance ruling, the present appeal has been filed by the appellant wherein it has been inter-alia submitted that the notice pay is a sum mutually agreed by the parties for breach of contract, therefore it can be regarded as a consideration flowing from the employment contract itself read with section 74 of the Indian Contract Act, 1872 and not under any other separate contract wherein employer has agreed to refrain from doing any act against the concerned employee. It has been submitted that once notice pay recovery is stipulated in the contract, the employer (appellant) can only sue for recovery of such amount but cannot enforce mandatory serving of the notice period. It has been argued that as the appellant cannot enforce mandatory serving of the notice period, the appellant cannot be said to have refrained from an act of suing the employee for mandatory serving against the notice pay recovery. Therefore, pay recovered cannot be said to be consideration against agreeing to the obligation to refrain from an act or to tolerate an act.
3.2 The appellant has referred to entry no. 1 of Schedule III of the Central Goods and Services Tax Act, 2017 and the Gujarat Goods and Services Tax Act, 2017 (herein after referred to as the ‘CGST Act, 2017’ and the ‘GGST Act, 2017’ respectively and the ‘GST Acts’ collectively)and has submitted that the notice pay recovery is nothing but deduction from the salary payable to the resigning employee; that it is not a separate consideration flowing from any independent contract and the employee is relieved from the services and issued a relieving letter once the terms of employment agreement (Appointment Letter) are fulfilled, hence it should be covered within the referred entry.
3.3 The appellant has relied upon the decisions in the cases of Nandinho Rebello Vs. Deputy Commissioner of Income Tax [(2017) 80 taxmann.com 297 (Ahmedabad – Trib.)], GE T & D India Limited Vs. Deputy Commissioner of Central Excise, Gujarat State Fertilizers and Chemical Ltd., and HCL Learning System Vs. CCE, Noida.
4. There has been change in one of the two Members of this authority consequent upon the transfer and posting of the Chief Commissioner, Gujarat Goods and Services Tax, after Personal Hearing has been held in this case. The appellant was therefore asked whether they require fresh hearing or not. The appellant vide their mail dated 03.01.2022 informed that by virtue of recent AAAR ruling issued by Madhya Pradesh Appellate Authority for Advance Ruling which held that “GST is not applicable on payment of notice pay by an employee to the applicant in lieu of notice period”, they find that their case is similar and no GST should be leviable on recovery of notice pay. They attached the copy of order dated 8.11.2021 passed by the Madhya Pradesh AAAR in the case of M/s. Bharat Oman Refineries Ltd., M.P. They further informed that they do not require personal hearing in the matter.
FINDINGS (AS PER SEEMA ARORA)
5. We have considered the submissions made by the appellant in the appeal filed by them as well as at the time of personal hearing, Ruling given by the GAAR and other evidences available on record.
6. As per the terms of contract, in the form of ‘Appointment Letter’, entered into between the appellant and its employees, in case of resignation by an employee, such employee is required to give three months’ notice to the appellant. In case of failure of the employee in giving such prior notice, the appellant is entitled to recover the amount equivalent to the salary of such notice period. The issue involved in the present case is whether such amount recovered by the appellant from the employee, for failure to give prior notice, is leviable to the Goods and Services Tax or otherwise.
7.1 The notice period is stipulated in the employment contract so that in case of resignation by an employee, new employee may be recruited, the work being performed by him may be assigned to some other person and activities of an organization are not disrupted. As submitted by the appellant, it recovers the agreed sum of money from the employees for unserved notice period to cover the loss of the company for immediate recruitment of new candidates and also to regularize the activities not handed over to upcoming employees.
7.2 Thus, it may be said that though the employee is required, as per the terms of the contract (Appointment Letter), to give the appellant three months’ prior notice before leaving the job so that the appellant may make alternate arrangements, in case the employee does not give such notice, the appellant is agreeing to tolerate such an act against the consideration in the form of an amount equivalent to salary of the notice period. As the said stipulation or condition is part of contract entered into between the employees and the appellant in the form of ‘Appointment Letter’ at the time of joining of the job, it may be termed as ‘liquidated damage’.The meaning of the term ‘liquidated damages’ has been given in the Black’s Law Dictionary as under –
“An amount contractually stipulated as a reasonable estimation of actual damages to be recovered by one party if the other party breaches. If the parties to a contract have agreed on liquidated damages, the sum fixed is the measure of damages for a breach, whether it exceeds or falls short of the actual damages. “
In the present case, the appellant and the employees have agreed that in case of leaving of job by the employee without giving three months’ notice, the amount equivalent to salary of unserved period of notice would be the measure of damages, which the appellant would receive from the employee concerned. The appellant would tolerate the hardship due to employee leaving the job without three months’ prior notice in breach of the terms of contract (Appointment Letter) and the appellant would be receiving the amount of ‘liquidated damages’ for the same.
7.3 As per para 5(e) of Schedule II read with section 7 of the GST Acts, ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’ is treated as supply of service. Therefore, the tolerating, by the appellant, of the act of employee leaving the job without giving three months’ notice against the consideration in the form of amount equivalent to salary of unserved notice period, is covered under the ‘supply of service’ under section 7 read with para 5(e) of Schedule II of the CGST Act, 2017 and the GGST Act, 2017.
7.4 . The classification of service has been provided in the Annexure to Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 and corresponding Notification No. 11/2017-State Tax (Rate) dated 30.06.2017 (the Central Tax (Rate) Notification herein after referred to includes the reference to corresponding State Tax (Rate) Notification also]. As per the said scheme of classification of services, Group 99979 for ‘other miscellaneous services’, inter-alia covers the following –
