Linde Engineering India Private Limited Vs C.C.E. & S.T.-Vadodara-I (CESTAT Ahmedabad)
Summary: CESTAT Ahmedabad allowed the appeal of Linde Engineering India Private Limited and set aside the Service Tax demand on Rs. 38,30,162/- recovered from employees as notice pay during financial years 2015-16 and 2016-17. The appellant was engaged in providing taxable output services including consulting engineering, erection, commissioning and installation, and construction services. During audit, the Department noticed that the appellant had recovered notice pay from employees who left employment without serving the notice period stipulated in their employment contracts. Treating such recovery as consideration for “agreeing to an 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, the Department demanded Service Tax of Rs. 5,42,310/- under Section 73(1), together with interest and penalties.
The adjudicating authority confirmed the demand and the Commissioner (Appeals) upheld it. CESTAT found that the issue was no longer res integra and followed Rajasthan Rajya Vidhyut Prasaran Nigam Limited Vs Commissioner of Central Excise and Service Tax, Jodhpur I, 2022 (1) TMI 909 (CESTAT New Delhi). That decision distinguished “consideration” received for contractual performance from “compensation” arising when a party reneges upon or fails to perform the contract. The Tribunal reiterated that Section 66E(e) applies where refraining from an act, tolerating an act or situation, or doing an act is itself the essence of the agreement and consideration is paid for that activity. Compensation predetermined under a contract for its breach does not become consideration merely because its amount is fixed in advance.
