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TMI Blog2022 (1) TMI 909X X X X Extracts X X X X X X X X Extracts X X X X ..... emature resignation, i.e., without giving the requisite notice period. A Show Cause Notice [SCN] dated 1.7.2016 was issued proposing to demand Service Tax amounting to Rs. 3,55,472/- on the amount which the appellant had recovered from its employees for premature resignations. It was also proposed to recover interest under Section 75 and impose penalty under section 78 of the Finance Act, 1994. 3. The Assistant Commissioner passed the Order in Original dated December 14, 2016 confirming the demand of service tax along with interest as proposed and imposed a penalty equal to the service tax confirmed under section 78. On appeal, the Commissioner (Appeals) has, by the impugned order, upheld the order in original. Hence, the appellant filed this appeal. 4. We have heard learned advocates for the appellant and the learned authorised representative for the revenue and perused the records. 5. The question which falls for consideration is "whether the amounts received or recovered by the employer from its employees for resigning from the service without giving the requisite notice is exigible to Service Tax as a Declared Service under Section 66E(e) of the Finance Act, 1994 or not". 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its employees is exigible to Service Tax under Section 66E(e). The case of the appellant is that it did not render any service nor has it entered into any agreement to tolerate its employees leaving without notice. It has only collected compensation for such an act of its employees. Therefore, the amounts received or recovered by it cannot be charged to service tax. 8. We find that both 'Service' as defined in Section 65B(44) and 'Declared Service' as defined in Section 65B (22) require the activity to be for a 'Consideration'. As per Section 66E (e) the following are declared services: (a) agreeing to the obligation to refrain from an act, or (b) agreeing to tolerate an act or a situation, or (c) agreeing to do an act. 9. Each of the above is a declared service and therefore, becomes exigible to service tax if it is done for a consideration. The dispute in this case appears to have arisen because the officers confused compensation for consideration. While a consideration is something received for performance under the contract, compensation is received if the other party reneges or fails to perform as per the contract. Consideration is the object of the contract and comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount on interest for an agreed period. If the borrower wants to pre-pay the loan, it frustrates the contract from the point of view of the bank and loan pre-payment charges (in the form of liquidated damages) are charged by the bank as per the loan agreement. These charges are not paid for rendering the service but as a penalty for the borrower reneging on his contract and not borrowing money for the entire period as originally agreed. When a telephone or electricity company renders service and issues a bill, the implicit agreement is that the customer will pay the bill within time. If the customer delays paying the bill, he will be required to compensate the company for the delay in the form of late fee. The late fee is not the purpose of the agreement but is a penalty for failure on the part of the customer to meet his end of the deal in paying the bill within time. 10. The argument of the Revenue is that liquidated damages (in this case, the penalty for resigning without notice period) is built into the contract itself. Therefore, it is agreed beforehand that if one of the parties reneges or fails to perform, the other will tolerate the situation in return for the amount to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an get a compensation. For instance, the patient desires the doctor to perform surgery with due care and does not desire that the doctor should be negligent and cause harm so that he can get compensation. The fact that the quantum of penalty or compensation is not decided by a court of law but is pre-agreed and built into the contract for the service itself in the form of liquidated damages does not make it a consideration; it remains compensation. It is a fall-back option if one of the parties frustrates the contract either by reneging on its commitments or by failing to perform. 13. What falls within the ambit of Section 66E(e) are cases where the essence of the agreement, i.e., the purpose for which the agreement is entered into itself is tolerating a situation or refraining from an Act in return for a consideration. Such an agreement could be: (a) an agreement agreeing to the obligation to refrain from an act, or (b) agreeing to tolerate an act or a situation, or (c) agreeing to do an act. 14. Evidently, if none of these are the purpose or the essence of the agreement or if there is no consideration for such an agreement, it does not fall within the ambit of Section 66 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpensation to be paid. Similarly, if the employee resigns without notice, compensation is paid by the employee or recovered from his dues. Both the notice period and the compensation are incorporated in the employment contact itself but these are not the purpose of the contract. Consequently, any compensation paid is not a consideration for the contract. 16. Since the provision of section 66E(e) appears to have given rise to some confusion, the Central Board of Excise and Customs issued CBEC's guidance notes dated 20.06.2012 para 2.9.3 clarifies as follows: "2.9. Provision of service by an employee to the employer is outside the ambit of service. 2.9.3 Would amounts received by an employee from the employer on premature termination of contract of employment be chargeable to service tax? No. Such amounts paid by the employer to the employee for premature termination of a contract of employment are treatable as amounts paid in relation to services provided by the employee to the employer in the course of employment. Hence, amounts so paid would not be chargeable to service tax. However any amount paid for not joining a competing business would be liable to be taxed being paid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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