APRIL 22, 2015

By Pritam Mahure, CA

AS per the employment contract/ human resource policy prevalent in many private organisations an employee is required to serve the stipulated notice period (which typically varies from 2 to 3 months) before he quits an organisation. However, in case an employee leaves the organisation before serving the stipulated notice period, then the employer may recover certain amount from the employees as 'notice pay recovery' in terms of the employment contract.

Thus, the question that needs be answered is whether this amount (notice pay recovery),which is recovered by an employer, would attract service tax?

Is it a 'service'?

In this regard, from 1 July 2012, any activity carried out by a person for another qualifies as a 'service' and attracts service tax (unless covered under Negative List or exempted otherwise). Further, 'service' includes a 'declared service' as defined under section 66E of the Finance Act, 1994 ('Act').

Clause (e) of section 66E of the Finance Act, 1994 ('the Act'), which states as to what constitutes 'declared service', is relevant for the issue under consideration.

Section 66E (e) of the Act covers under it's' ambit “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” .

From section 66E (e) of the Act, it can be observed that even ' agreeing to the obligation to refrain from an act, or to tolerate an act' for a consideration could qualify as a 'service' an attract service tax.

Given this, when an employee intends to leave an Organisation (say within a month time) rather than serving the stipulated notice period (say of two months) then this activity of toleration of an act by the employer could qualify as 'declared service' and in-turn attract service tax.

Is it not excluded from 'service'?

It could be of relevance to refer section 65B (44) of the Act which excludes from its ambit ' provision of service by an employee to the employer in the course of or in relation to his employment'.

It can be noted that what is excluded from the definition of 'service' is 'provision of service by an employee to the employer' . Thus, in view of the terms used (specifically 'by' an employee), it can be construed that provision of service only 'by' an employee to the employer will get excluded from the ambit of the term 'service' (and not service provided by an 'employer' to the employee).

In case of notice pay recovery, the service provider is 'employer' (who is tolerating the act of an employee and thereby providing a 'declared service') and thus, employers may not get covered in the exclusion clause of the term 'service'.

Similarly, the term 'in relation to his employment' will only include services by an employee (and not services by an employer) as scope of the phrase “in relation to” have to be understood in its context [See Navin Chemicals Mfg. and Trading Co. Ltd. - 2002-TIOL-460-SC-CUS.

Is there any clarification on this issue by Board?

This aspect is also clarified a Para 2.9.1 of Education Guide wherein it is stated that 'Only services that are provided by the employee to the employer in the course of employment are outside the ambit of services' .

In view of the aforesaid discussion, it can be stated that an employer will be liable to pay service tax on the amounts recovered as 'notice pay recovery' from employees.

To put it simply, 'To serve the notice' [by employee] or 'To serve notice' [SCN by department] is the question.

So, should we have a 'naav par charcha'?