Case Law Details
Kellogg India Pvt. Ltd Vs Commissioner of CGST & CE (CESTAT Mumbai)
Introduction: In a landmark ruling, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Mumbai has annulled a service tax demand against Kellogg India Pvt. Ltd. The Tribunal confirmed that salary, including notice pay recovery, falls outside the purview of service tax. The dispute arose when the tax authorities treated recovered amounts from employees leaving without the stipulated notice as a “declared service” subject to service tax.
Analysis: The case revolved around an agreement between Kellogg India and its employees, stating that if an employee leaves without giving the agreed three-month notice, the company would deduct an amount equivalent to the incomplete notice period from the unpaid salary or other dues. Revenue authorities viewed this as a declared service and demanded service tax on the amounts not paid to departing employees.
Kellogg India argued that the unpaid salary accounted for in their books as “notice pay recovery” was not a service consideration but part of the total salary compensation. As salary is not subject to service tax, the company contended that the unpaid portion shouldn’t be either.
The Tribunal ruled in favour of Kellogg India, affirming that the company hadn’t received any service consideration, and thus, service tax did not apply. The Tribunal noted that the disputed amount was, in fact, unpaid salary, which falls outside the service tax ambit. The ruling also referred to a precedent case (HCL Learning Ltd. vs Commissioner of Central Goods and Service Tax, Noida) in reaching its conclusion.
Conclusion: The CESTAT Mumbai’s ruling is an important one for employers and employees alike, as it clearly distinguishes between salary and service consideration. The decision emphasizes that salary, including portions withheld due to employee actions like resigning without notice, does not attract service tax.
FULL TEXT OF THE CESTAT MUMBAI ORDER
The appellant is manufacturer of excisable goods and is also holding service tax registration. The appellant was issued with a show cause notice dated 08.04.2019 demanding service tax amounting to Rs.29,08,508/-. It was stated in the said show cause notice that Revenue has verified trial balance and books of accounts of the appellant and noticed that in respect of those employees who left their job without giving notice to the appellant for the period which was agreed upon between the appellant and their employees in case their employees leave the job there were recoveries of sums. It was agreed between the appellant and their employees under clause 10 of agreement that in case the employee leaves the job with the appellant before serving the stipulated notice period of three months, the appellant would deduct an amount equivalent to incomplete days of notice period as basic salary from unpaid salary or such other dues to be paid to the employee. It was argued in the said show cause notice that the said act of the appellant was a declared service and therefore the appellant was required to pay the said service tax on an amount of Rs.2,09,33,892/- not paid to the employees leaving employment, for the period from April 2014 to June 2017. The said show cause notice was on contest adjudicated through order-in-original dated 25.06.2020. The original authority confirmed the demand and imposed penalties. Aggrieved by the said order, appellant preferred appeal before the Commissioner (Appeals). The learned Commissioner (Appeals) decided the said appeal through the impugned order‑ in-appeal dated 26.11.2020. The learned Commissioner (Appeals) did not interfere with the order passed by the original authority. Therefore, the appellant is before this Tribunal.
2. Heard the learned counsel for the appellant. He has submitted that the appellant enters into a contract with its employees and the term also includes that if the employee leaves the job without giving three months’ notice to the appellant, then on the basis of incomplete days of notice period, some amount payable would be deducted from the amount payable to the employee. He has submitted that the appellant does not receive any consideration from its employee. The unpaid salary is accounted for in the books of account as notice pay recovery and the same is treated by Revenue as consideration for declared service for agreeing to tolerate the act of leaving the employment. He has submitted that the amount which is unpaid to the employee is salary not paid and salary not paid is a part of total compensation of salary which is out of the purview of service tax. He has also submitted that the issue is no more res integra and has been decided by this Tribunal in the case of HCL Learning Ltd. vs Commissioner of Central Goods and Service Tax, Noida reported at 2019-TIOL-3545-CESTAT‑ ALL. He further submitted that following the precedent decision, there is no case for Revenue.
3. Heard the learned AR who has supported the impugned order.
4. We have carefully gone through the record of the case and the submissions made. We note that the show cause notice has very clearly stated that the amount of Rs.2,09,33,892/- is recorded in the books of account as salary not paid to the The basic fundamental of charging service tax at ad valorem is that the service provider has to receive consideration from the service recipient. Here as per the show cause notice, the appellant has not received any consideration and, therefore, the question of payment of service tax does not arise. The amount which is stated by Revenue in the show cause notice is the amount not paid as salary and retained by the appellant. Salary is out of the purview of service tax. Further, this issue is no more res integra and decided through case law relied upon by the appellant. In the said final order of this Tribunal, it has been held that such recovery is out of salary and salary is not covered by the provisions of service tax and, therefore, the demand is not sustainable.
5. By following the precedent decision, we set aside the impugned order and allow the appeal.
(Order pronounced in the open court on 16.06.2023))
