TMI Blog2022 (1) TMI 903X X X X Extracts X X X X X X X X Extracts X X X X ..... h as used preceding the words sale, transfer, barter, exchange, etc. indicates that the forms of supply shall be those which are enumerated therein or of similar character but not of other dissimilar forms of supply. The expression such as indicates the character of the transactions - The employee opting to resign by paying amount equivalent to month of salary in lieu of notice, has acted in accordance with the contract and that being the case no question of any forbearance or tolerance does arise. Further, as per the agreement, the resignation by the employee is not subject to any acceptance or approval and employee is free to tender his resignation, make payment of notice period salary to leave. Hence, there is neither any activity nor any passive role played by the employer. It must be noted here, that there is no consideration within the meaning of Sec.2(31)(b) of the CGST Act, 2017 flowing from an act of forbearance in as much as there is no breach of contract, as a question of any consideration for forbearance would arise in case of breach of contract. It may be concluded that, recovery of notice pay from dues of employee / payment of notice pay by the employee who coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2 Applicant issues employment letter ( Employment Agreement ) to its employees, which contains various terms and conditions of employment. Applicant, in its General Employment Conditions ( 'HR Policy' ) also mentions the terms and conditions related to work, responsibility, termination, etc. Parental Insurance 2.3 Voluntary Parental insurance is provided to employees whereas premium of the group insurance policy of the employees is completely borne by Applicant, the amount of the Parental Insurance Policy, is recovered from the salary of the employee who opts for it. The Applicant has entered into an arrangement with the insurance company to provide the said parental insurance cover where the Applicant initially pays the entire premium along with the applicable taxes to the insurance company and the insurance company issues the premium receipt in the name of the Applicant. Applicant recovers full amount paid to the insurance company, in respect of the parental insurance and no profit element is involved while recovering the premium of the policy. 2.4 The claims, by employees under the parental insurance policy, are directly filed with the insurance compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Applicant qualifies as a insurer . Therefore, the Applicant cannot be said to be engaged in the business of providing insurance services. 2.8.4 The Applicant submits that any activity which is incidental and ancillary to the main business activities should only be covered with the ambit of the definition of the term 'business'. In the present case, the parental insurance scheme is merely a facility extended to the employees. Hence, the said activity cannot be treated as 'business' as defined in Section 2(17) of CGST Act. 2.8.5 In this regard, reliance can be placed on the decision of Apex Court in the case of State of Gujarat vs. Raipur Manufacturing Co. Ltd. (Civil Appeal No. 603 of 1966) wherein the Petitioner was engaged in the business of manufacturing and selling cotton textiles. The Petitioner purchased coal for usage in business of cotton textiles. The said coal was later sold by the Petitioner. The Supreme Court held that the Petitioner was not engaged in the business of coal. 2.8.6 The activities which are having direct nexus with the main business can be said to be ancillary or incidental. One of such examples of the same could be sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'supply' and therefore, GST should not be applicable. 2.10 Without prejudice to the above, it is settled position under GST regime that employee recoveries do not amount to 'supply'. 2.10.1 The Applicant submits that it is a settled legal position that the employee recovery would not qualify as 'supply' under GST and hence, not taxable. Reliance is placed in the case of M/s Jotun India Private Limited, [2019-TIOL-312-AAR-GST] and M/s POSCO India Pune Processing Centre Private Limited [2019 (2) TMI 63] 2.10.2 The understanding of the Applicant is supported by the aforesaid rulings that the Applicant is not involved in the business of providing insurance, and is only a facilitator in the transaction between the employee and the third-party insurance service provider. Therefore, the said activity does not qualify as service and hence, GST is not applicable on the same. Applicant's Interpretation with respect to notice pay recoveries made from employees for not serving the notice period, are provided below which are without prejudice to each other. 2.11 The notice pay recovery made by the Applicant does not qualify as conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of compensation as a legal course of action. Therefore, upon default on the part of the employees in complying with the employment agreement, the Applicant shall be entitled to receive damages compensation stipulated in the employment agreement in accordance with Section 73 and 74 of the Indian Contract Act, 1872. 2.13.2 The above provisions also cover the case of notice pay recovery. Therefore, the notice pay recovered by the Applicant can at best be treated as compensation towards the loss of the Applicant for the breach of the contract by the employee. 2.13.3 Reliance is also placed on Para 2.3.1. of 'Education Guide' dated 20.06.2012 issued by CBEC, Ministry of Finance, wherein it has been clarified that fines and penalties which are legal consequences of a person's actions are not in the nature of 'consideration' for an activity. 2.13.4 In the present case that the Applicant is not carrying on any activity for a consideration. The money received by the Applicant is merely in the form of a fine or penalty for failure to serve the notice period and cannot be in the nature of consideration. The penalty imposed by the employer on its employee is a par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Learning Ltd. [2019 (12) TMI 558] has also held that notice pay recovery is not liable to service tax. 2.15.4 Further, on perusal of the employment agreement, it can be clearly inferred that it is not the case that the agreement is entered into for providing notice pay terms and conditions. Hence, the agreement should be appreciated in its true spirit and to construe that the agreement is to provide the employment services by employee to the Applicant. 2.15.5 The Applicant relies on the case of Ishikawajima-Harima Heavy Industries v CIT [2007, 288 ITR 408, 440 (SC)], and Sundaram Finance Limited v State of Kerala [AIR 1966 SC 1178], 2.15.6 Reliance is also placed on the Income Tax case law of Nandhino Rebello vs. DCIT, [Circle-14, ITA No. 2378/Ahd/2013], decided on 18.04.2017 wherein the Hon'ble Tribunal held that notice pay recovery is a part of the salary only. 2.15.7 Therefore, in light of the above submission, GST cannot be demanded on the notice pay recovery collected by the Applicant as the same is not a supply as per Section 7 (2) (a) read with Schedule III to the CGST Act. 2.15.8 Further, it is submitted that Schedule II of the CGST Act provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services u/s 7 (1) of CGST Act 2017. In this case GST is applicable @ 18% under the entry of Services Not Elsewhere Classified on amount of recovery of notice pay from employee. Notice pay recovery should be subjected to GST ACT of 'Non Compliance' of employment contract wherein employer is receiving consideration from employee for toleration of Act. Such a toleration of Act is defined as 'Supply of Service' in schedule 11 of CGST Act 2017. 3.2.3 REFERENCE: 1) AMNEAL PHARMACEUTICALS PVT LTD (AAR GUJRAT) 2) CALTECH POLYMERS PVT LTD (KERALA AAR) 04. HEARING 4.1 Preliminary hearing was held via virtual mode on 13.07.2021. Authorized representatives of the Applicant, Shri. Sandeep Sachdeva, Advocate, Shri. Sanjay Raut, Shri. Shankar Rochlani, Shri Pranav Mundra and Shri. Prashant Walwaikar were present. Jurisdictional officer Shri. Babasaheb Shedge, Deputy Commissioner, PUN-VAT-E-622, LTU-2 was also present. The Authorized representative made oral submissions with respect to admission of their application. 4.2 The application was admitted and called for final online hearing on 28.12.2021. Authorized representatives of the Applicant, Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 100% is recovered from the employees of premium paid by the applicant to the Insurance Company. 5.2.3 Since the facts, in the case of M/s Jotun India Private Limited and also in the case of M/s POSCO India Pune Processing Centre Private Limited are similar to the facts of the present case with respect to recovery of premiums from the employees, paid by the applicant on Parental Insurance Policy, there is no reason or us to deviate from the decisions taken in both the said cases and therefore we hold that, in the instant case, GST would not be payable on recoveries made from the employees towards providing parental insurance. 5.3 Question No. 2: Whether the GST would be payable on the notice pay recoveries made from the employees on account of not serving the full notice period? 5.3.1 We have considered the applicant's submissions, the relevant facts and interpretation of GST Laws made by the applicant with respect to the question whether the applicant is liable to pay GST on recovery of Notice Pay from the employees who are leaving the Applicant company without completing the notice period as specified in the Employment Letter entered into, by both the Applicant a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gards the present situation where the employee had paid the employer for waiver of notice period, the matter had come up before the Hon'ble Madras High Court in W.P. Nos 35728 to 35734 of 2016 in the case of GE T D India Ltd Vs Deputy Commr of Central Excise, LTU, Chennai 2020-VIL-39-MAD-ST . The Hon'ble high court applying the CBEC's clarification observed that the employer cannot be said to have rendered any service per se much less a taxable service and has merely facilitated the exit of the employee upon imposition of a cost upon him for the sudden exit . The Hon'ble Court further held that 'the definition in clause (e) of Section 66E is not attracted to the scenario before me as, in my considered view, the employer has not 'tolerated' any act of the employee but has permitted a sudden exit upon being compensated by the 'employee in this regard. Though normally, a contract of employment qua an employer and employee has to be read as a whole, there are situations within a contract that constitute rendition of service such as breach of a stipulation of non-compete. Notice pay, in lieu of sudden termination however, does not give rise to the rendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II. (amended retrospective effect from 1.7.2017) 2. Notwithstanding anything contained in sub-section (1),- (a) activities or transactions specified in Schedule III; or (b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services. 3. xxxxxxx SCHEDULE III of Section 7 - Activities or transactions which shall be treated as neither supply of goods nor supply of services. 1. Services by an employee to the employer in the course of or in relation to his employment. 2. xxxx From the above, it is clear that the levy under CGST Act, 2017 is on supply of goods or services or both. The word such as used preceding the words sale, transfer, barter, exchange, etc. indicates that the forms of supply shall be those which are enumerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onetary value of any act or forbearance. The word Service defined under Section 2(102) of the CGST Act, 2017 means anything other than goods, money and securities. It is pertinent to understand before levy; (i) whether the receipt or deduction of salary in lieu of notice period by an employee can be said to be consideration for an act of forbearance and (ii) whether the act of accepting the resignation without contractual period of notice from an employee can be said to be an act of toleration. The employee opting to resign by paying amount equivalent to month of salary in lieu of notice, has acted in accordance with the contract and that being the case no question of any forbearance or tolerance does arise. Further, as per the agreement, the resignation by the employee is not subject to any acceptance or approval and employee is free to tender his resignation, make payment of notice period salary to leave. Hence, there is neither any activity nor any passive role played by the employer. It must be noted here, that there is no consideration within the meaning of Sec.2(31)(b) of the CGST Act, 2017 flowing from an act of forbearance in as much as there is no breach of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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