High Court Judgment on Service Tax Implications on Notice Pay

by | Feb 5, 2020 | Insight

The recent decision of Madras High Court in the case of GE T&D India Limited v. Deputy Commissioner of Central Excise, 2020-VIL-39-MAD-ST.

In this case, the authorities demanded service tax on the amount of notice pay recovered by taxpayer from its employee’s salary. The employment contract encompassed a situation wherein the employee was required to compensate the taxpayer in a case of sudden and unexpected termination of duty.

The High Court held that the employer cannot be said to have rendered any taxable service as per Section 66E(e) of the Finance Act, 1994 (i.e. toleration of an act) and has merely facilitated the exit of the employee upon imposition of a cost for the sudden exit.

 NITYA’s Comments: The above is the first decision of any High Court on the vexed issue of applicability of Service Tax on notice pay recoveries and comes as a major relief to the taxpayers. For pre-GST regime, taxpayers can continue to challenge applicability of Service Tax on notice pay recovery basis the above case as well as other cases and grounds discussed in NITYA’s Insight | Issue 76 | Service Tax Implications on Notice Pay dated December 13, 2019 (Click here to access update),  NITYA’s Insight | Issue 52 | Service Tax Implications on Notice Pay dated October 11, 2019 (Click here to access update) and NITYA’s Insight | Issue 41 | Recent Tribunal decisions on ‘toleration of an act’ dated September 4, 2019 (Click here to access update). This ruling is equally relevant under GST regime as well which contains similar provisions. Basis this, the taxpayers need not pay GST on notice pay recoveries.