2025 (4) TMI 818 - AT - Service Tax

Classification of service - liquidated damages or declared services - bond amount recovered from employees leaving University before notice period whether the amount forfeited from the students who discontinue the course midway - HELD THAT - The issue is no longer res integra the issue is squarely covered by the decisions/judgments cited supra. Premature leaving of the employment results in disruption of work and an undesirable situation. The provisions for forfeiture of salary or recovery of bond amount in the event of the employee leaving the employment before the minimum agreed period or the amount forfeited from the students who discontinue the course midway cannot be considered as liquidated damage or service under the category of declared service. It can be considered as penalties for dissuading to discourage and to deter such a situation. Conclusion - The amounts recovered as bond amounts from employees and forfeited fees from students do not constitute a service under the category of declared service. Appeal allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal question considered in the appeals was whether the bond amounts recovered from employees leaving the university before the notice period and the amounts forfeited from students who discontinue their courses midway should be classified as liquidated damages or as a service under the category of declared service according to the provisions of the Finance Act, 1994.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The Tribunal examined the definition of 'service' and 'declared service' under the Finance Act, 1994. According to Section 66B(44), "Service" includes any activity carried out by a person for another for consideration, including declared services, but excludes certain activities such as transfer of title in goods or immovable property, transactions in money, and services provided by an employee to the employer in the course of employment. Section 66E lists declared services, including the obligation to refrain from an act, tolerate an act, or do an act.

The Tribunal also considered precedents such as the judgment of the Hon'ble High Court of Madras in GE T&D India Ltd., which clarified that amounts received by an employee from an employer on premature termination of a contract of employment are not chargeable to service tax, as they do not constitute the rendition of service.

Court's Interpretation and Reasoning

The Tribunal interpreted that the amounts recovered from employees and students were not for any underlying service but were penalties to discourage premature leaving or discontinuation. The Tribunal emphasized that these recoveries are not consideration for tolerating an act or situation but are penalties to deter such actions.

Key Evidence and Findings

The Tribunal noted the appellant's argument that the bond amounts and fee forfeitures were not related to any service rendered. The appellant highlighted that these amounts were penalties for non-compliance with contractual obligations and not payments for any service.

Application of Law to Facts

The Tribunal applied the legal definitions and precedents to determine that the recoveries in question did not fall under the category of declared services. The Tribunal found that the amounts were not for tolerating an act or situation but were penalties for breach of contract, thus not taxable under the service tax regime.

Treatment of Competing Arguments

The Tribunal considered the Revenue's argument that the recoveries constituted declared services under Section 66E(e) of the Finance Act. However, the Tribunal found that the amounts were penalties and not consideration for any service, thus not taxable. The Tribunal also referenced the circulars and judgments that supported the appellant's position.

Conclusions

The Tribunal concluded that the bond amounts and fee forfeitures were not taxable as declared services. The Tribunal found that these amounts were penalties and not consideration for any service, thereby allowing the appeals.

SIGNIFICANT HOLDINGS

The Tribunal held that the amounts recovered as bond amounts from employees and forfeited fees from students do not constitute a service under the category of declared service. The Tribunal stated, "Premature leaving of the employment results in disruption of work and an undesirable situation. The provisions for forfeiture of salary or recovery of bond amount in the event of the employee leaving the employment before the minimum agreed period or the amount forfeited from the students, who discontinue the course midway cannot be considered as liquidated damage or service under the category of declared service."

The Tribunal established the principle that such recoveries are penalties and not consideration for tolerating an act or situation, thus not subject to service tax.

The final determination was that the appeals filed by the appellant were sustainable, and the Tribunal allowed the appeals with consequential relief in accordance with the law.