Neel Metal Products Ltd Vs Commissioner of Central Excise (CESTAT Chandigarh)
Summary: The Chandigarh Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) allowed the appeal filed by M/s Neel Metal Products Ltd against Order-in-Appeal No. 119/ST/CGST-APPEAL-GURUGRAM/SG/2018 dated 30.08.2018, by which the Commissioner (Appeals), CGST, Gurugram had rejected the appellant’s appeal and upheld the Order-in-Original dated 16.03.2018. The Tribunal pronounced Final Order No. 60469/2026 on 23.07.2026.
The appellant was engaged in the manufacture of auto components and, during the relevant period, was registered under the Central Excise Act, 1944 and the Finance Act, 1994. During an audit conducted in January 2017 for the period 2015-16, the Department took the view that amounts received by the appellant as “notice pay” constituted consideration for the declared service described in Section 66E(e) of the Finance Act, 1994, namely agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act.
A Show Cause Notice dated 25.04.2017 was consequently issued invoking the extended period of limitation and demanding service tax of Rs. 13,53,012/- on notice pay receipts of Rs. 1,02,02,702/- for the period August 2012 to December 2016, together with interest and penalty. The Original Authority confirmed the demand along with equal penalty by Order-in-Original dated 16.03.2018. The Commissioner (Appeals) subsequently rejected the appellant’s appeal, leading to the present proceedings before CESTAT.
Before the Tribunal, the appellant contended that the impugned order was contrary to binding judicial precedents on the identical issue. It was submitted that Section 65B(44)(b) of the Finance Act, 1994 expressly excluded from the definition of “service” a provision of service by an employee to the employer in the course of or in relation to employment. According to the appellant, the notice/notice-pay stipulation was itself a term of the employment contract, and the payment arose from the employment relationship.
The appellant further argued that notice pay accrued because of the employee’s failure to serve the notice period and was not consideration for any act or omission by the employer. It was characterised as penalty or compensation for breach of contractual terms rather than consideration for a service.
Reliance was also placed on CBIC Circular No. 178/10/2022-GST dated 03.08.2022 and Circular No. 214/1/2023-ST dated 28.02.2023. According to the appellant, these clarifications established that activities falling within Section 66E(e) are those contemplated under an independent contractual arrangement specifically referring to the relevant activity, with a flow of consideration having nexus with that activity, whereas liquidated damages, penalties for breach and forfeiture of notice pay in lieu of the notice period are not consideration for a declared service. TaxGuru has separately published the text and discussion of Circular No. 178/10/2022-GST.
The appellant relied upon decisions including GE T&D India Ltd. Vs. Deputy Commissioner of Central Excise, LTU, Chennai, Shriram Pistons & Rings Ltd. Vs. Commissioner of Central Tax, M/s Instakart Services Pvt Ltd Vs. Commissioner of Central Tax, Bengaluru, M/s KJS Cement Ltd Vs. Commissioner of CGST, Central Excise & Customs Jabalpur and M/s Maruti Suzuki India Ltd Vs. Commissioner of Service Tax. It was also contended that the Commissioner (Appeals) had wrongly relied upon Shri Ashwini Kumar Bajaj & Others vs. CCE & ST, Chandigarh, Final Order No. 60015-60017/2018, which, according to the appellant, involved different facts. The appellant additionally challenged invocation of the extended period of limitation.
The Revenue, on the other hand, reiterated the findings recorded in the impugned order.
The Tribunal framed the issue as whether the amount received or recovered by an employer from an outgoing employee as “notice pay”, i.e. salary in lieu of the contractually stipulated notice period, constitutes consideration for a declared service under Section 66E(e) read with Sections 65B(44) and 66B of the Finance Act, 1994 and is therefore exigible to service tax.
CESTAT held that the issue was no longer res integra and was squarely covered by the judgment of the Madras High Court and decisions of various Tribunal Benches cited in the appeal. The Tribunal also relied upon the CBIC’s Circular No. 178/10/2022-GST dated 03.08.2022 read with Circular No. 214/1/2023-ST dated 28.02.2023, noting that the Board had clarified that activities contemplated under Section 66E(e) require the relevant activity to be specifically referred to in the agreement and consideration to flow in relation to that activity. The Tribunal recorded the clarification that liquidated damages, penalties for breach and forfeiture of notice pay in lieu of the notice period are not consideration for a declared service.
Following the cited judicial decisions and considering the CBIC circulars, the Tribunal concluded that the impugned order was not sustainable in law. It therefore set aside the impugned Order-in-Appeal and allowed the appeal with consequential relief, if any, as per law.
Cases Discussed
- GE T&D India Ltd. Vs. Deputy Commissioner of Central Excise, LTU, Chennai, 2020 (35) G.S.T.L. 89 (Mad.) — the Tribunal identified the Madras High Court judgment as squarely covering the issue of taxability of notice pay recovery.
- Shriram Pistons & Rings Ltd. Vs. Commissioner of Central Tax, [2021] 126 taxmann.com 183 (CESTAT Allahabad) — referred to as one of the Tribunal decisions settling the issue in favour of the appellant.
- M/s Instakart Services Pvt Ltd Vs. Commissioner of Central Tax, Bengaluru, 2024 (3) TMI 1350 (CESTAT Bangalore) — referred to among the decisions covering the issue.
- M/s KJS Cement Ltd Vs. Commissioner of CGST, Central Excise & Customs Jabalpur, 2023 (12) TMI 903 (CESTAT New Delhi) — referred to among the decisions covering the issue.
- M/s Maruti Suzuki India Ltd Vs. Commissioner of Service Tax, 2026 (3) TMI 411 (CESTAT Chandigarh) — referred to among the decisions covering the issue.
- Shri Ashwini Kumar Bajaj & Others vs. CCE & ST, Chandigarh, Final Order No. 60015-60017/2018 — distinguished by the appellant as being based on entirely different facts; the Commissioner (Appeals) had relied upon this decision.
FULL TEXT OF THE ORDER OF CESTAT CHANDIGARH
The present appeal is directed against the impugned Order-in-Appeal dated 30.08.2018 passed by the Commissioner (Appeals), CGST, Gurugram, whereby the learned Commissioner (Appeals) has rejected the appeal of the Appellant by upholding the Order-in-Original dated 16.03.2018.
2. Briefly stated facts of the present case are that the Appellant M/s Neel Metal Products Ltd are engaged in the manufacture of auto components and during the relevant period, were registered under the Central Excise Act, 1944 and Finance Act, 1994. On the basis of scrutiny of records during the audit conducted in January 2017 for the period 2015-16, a view was taken by the Department that the amounts received by the Appellant as ‘notice pay’ constituted consideration for the declared service of “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” under Section 66E(e) of the Finance Act, 1994.
Subsequently, a Show Cause Notice dated 25.04.2017 was issued, invoking the extended period of limitation, demanding service tax of Rs. 13,53,012/- on ‘notice pay’ receipts of Rs. 1,02,02,702/- for the period August 2012 to December 2016, along with interest and penalty. After following the due process, the Original Authority vide Order-in-Original dated 16.03.2018, confirmed the demand along with equal penalty. Aggrieved by the said Order-in-Original, the Appellant filed an appeal before the Commissioner (Appeals), who vide the impugned Order-in-Appeal, rejected the same. Hence, the present appeal.
3. Heard both the parties and perused the material on record.
4. The learned Counsel for the Appellant submits that the impugned order is not sustainable in law as the same is contrary to the binding judicial precedents on the identical issue.
4.1 He further submits that Section 65B(44)(b) of the Finance Act, 1994, expressly excludes from the definition of ‘service’ the provision of service by an employee to the employer in the course of or in relation to his employment; the notice/notice-pay stipulation is a term of the contract of employment itself, the payment flows from, and only from, the employment relationship; any activity referable to the terms of employment contained in the appointment letter is therefore outside the pale of ‘service’ altogether. He also submits that the amount accrues to the Appellant on account of the employee’s failure to serve the notice period, and not on account of any act or omission on the part of the Appellant; a payment made by a person for his own act or omission, which is in the nature of a breach of the terms of an agreement, to the person put to disadvantage thereby, is in the nature of penalty or compensation and cannot be regarded as consideration for a service.
4.2 He further refers to CBIC’s Circular No. 178/10/2022-GST dated 03.08.2022 read with Circular No. 214/1/2023-ST dated 28.02.2023 which itself has clarified that activities contemplated under Section 66E(e) of the Finance Act, 1994 are only those conceived in an independent contractual arrangement specifically referring to such activity with a flow of consideration having nexus therewith; and that amounts such as liquidated damages, penalties for breach, and forfeiture of notice pay in lieu of the notice period are not consideration for any declared service.
4.3 He further submits that the issue involved in the present case is no more res integra as the same stands settled in favour of the Assessee/Appellant by the Hon’ble Madras High Court as well as various benches of the Tribunal in the following case-laws:
- GE T&D India Ltd. Vs. Deputy Commissioner of Central Excise, LTU, Chennai – 2020 (35) G.S.T.L. 89 (Mad.)
- Shriram Pistons & Rings Ltd. Vs. Commissioner of Central Tax – [2021] 126 taxmann.com 183 (CESTAT Allahabad)
- M/s Instakart Services Pvt Ltd Vs. Commissioner of Central Tax, Bengaluru – 2024 (3) TMI 1350 CESTAT Bangalore
- M/s KJS Cement Ltd Vs. Commissioner of CGST, Central Excise & Customs Jabalpur – 2023 (12) TMI 903 CESTAT New Delhi
- M/s Maruti Suzuki India Ltd Vs. Commissioner of Service Tax – 2026 (3) TMI 411 CESTAT Chandigarh
4.4 He further submits that in the impugned order, the Commissioner (Appeals) has wrongly relied upon the decision of the Tribunal in the case of Shri Ashwini Kumar Bajaj & Others vs. CCE & ST, Chandigarh – Final Order No. 60015-60017/2018, which is on entirely different facts, whereas the decisions cited above, relied upon by him, are squarely covering the issue.
4.5 He also questions the invocation of extended period of limitation.
5. On the other hand, the learned Authorized Representative for the Respondent-Revenue reiterates the findings of the impugned order.
6. After considering the submissions made by both the parties and perusal of the material, we find that the issue involved in the present case is whether the amount received/recovered by an employer from an outgoing employee as ‘notice pay’, i.e. salary in lieu of the contractually stipulated notice period, is consideration for a ‘declared service’ under Section 66E(e) read with Sections 65B(44) and 66B of the Finance Act, 1994, exigible to service tax or not?
7. We find that the said issue is no more res integra and is squarely covered by the judgment of the Hon’ble Madras High Court as well as by the decisions of various benches of the Tribunal in the cases as cited supra.
8. We also find that the CBIC vide its Circular No. 178/10/2022-GST dated 03.08.2022 read with Circular No. 214/1/2023-ST dated 28.02.2023 itself has clarified that activities contemplated under Section 66E(e) of the Finance Act, 1994 are only those conceived in an independent contractual arrangement specifically referring to such activity with a flow of consideration having nexus therewith; and amounts such as liquidated damages, penalties for breach, and forfeiture of notice pay in lieu of the notice period are not consideration for any declared service.
9. Since the issue involved in the present case is squarely covered in favour of the Appellant by the various decisions as cited above, therefore, by following the ratios of the same and also by considering the CBIC’s above-mentioned circulars, we are of the considered opinion that the impugned order is not sustainable in law and therefore, we set aside the same and allow the appeal of the Appellant with consequential relief, if any, as per law.
(Operative part of the order pronounced in the open court)
