GE T & D India Limited Vs Deputy Commissioner of Central Excise (Madras High Court)
In GE T&D India Limited vs. Deputy Commissioner of Central Excise, the Madras High Court addressed whether payments received by the employer from outgoing employees in lieu of notice period are subject to service tax under Section 66E(e) of the Finance Act, 1994. The case originated from assessments where tax authorities concluded that the employer had rendered a taxable service by tolerating the premature exit of employees, thus fitting under the clause that treats agreeing to tolerate an act as a declared service. GE T&D, however, contended that such notice pay is a contractual mechanism within employment terms and not a form of service rendered by the employer.
The Court referred to its earlier ruling in a similar matter, where it had held that notice pay does not constitute taxable service. It highlighted the employer’s contractual right to compensation in cases where employees opt for immediate resignation instead of serving the notice period. The judge rejected the Revenue’s interpretation that the employer had “tolerated” the act of resignation in exchange for compensation, stating that the payment did not reflect any act of service. The decision cited the CBEC’s own guidance, which clarified that payments related to premature termination of employment are not taxable. Accordingly, the Court allowed the writ petitions, quashing the tax demands and dismissing the argument that the petitioner should be directed to pursue an alternative statutory remedy.
