GST Update No 168 on Notice pay recovery- Divergent Views

Levy of GST on notice pay recovery of employees has been a matter of discussion since introduction of GST. Although Schedule III of CGST Act, 2017 clearly states that no GST shall be leviable in case of services provided by employee to employer during employment, still, the issue revolves around on the fact that whether GST shall be applicable on notice pay recovery. Similar issue was raised in the case of M/s Amneal Pharmaceuticals Pvt. Ltd. in front of Gujarat AAAR challenging the decision of AAR. The decision imparted is subject matter of our present update. The appellant submitted that a contract is entered by the employee having a clause that services can be terminated by either giving three months’ notice or notice pay in lieu of notice period. This is done to compensate the loss of immediate recruitment and regularize working of the employee in case of sudden resignation by the employee. Therefore, advance ruling was sought on applicability of GST on notice pay recovery. The appellant submitted that the recovery cannot be termed as a consideration against agreeing to the obligation to refrain from an act or tolerance of an act since employer cannot sue for mandatory serving of notice period. Further, it was argued that the aforesaid supply shall be covered under Schedule III of CGST Act, 2017 and therefore, no GST shall be leviable. Reliance was placed on Nandinho Rebello Vs. Deputy Commissioner of Income Tax [(2017) 80 taxmann.com 297 (Ahmedabad – Trib.)], GE T & D India Limited Vs. Deputy Commissioner of Central Excise, Gujarat State Fertilizers and Chemical Ltd., and HCL Learning System Vs. CCE, Noida, Madhya Pradesh AAAR in the case of M/s. Bharat Oman Refineries Ltd., M.P. The decision of AAR is challenged in front of AAAR. According to the first member, the appellant is agreeing to tolerate an act against the consideration which shall be termed as “liquidated damages”. Further, as per para 5(e) of Schedule II of CGST Act, 2017, “agreeing to obligation to refrain from an act or to tolerate an act” shall be treated as supply of service. Further, it is not also covered under Notification No. 12/2017 dated 28.06.2017 entry no. 62. Furthermore, entry 1 of Schedule III of CGST Rules, 2017 does not covers entry of tolerating any breach or act by employer. Neither the employee is providing service nor it is in relation to employment. Therefore, GST is payable. The dissenting member held that all the conditions as prescribed under Section 7 of CGST Act, 2017 should be satisfied to term it as “supply”. The words “made or agreed to be made” were interpreted and it was concluded that it suggests a degree of voluntary act on the part of service provider. The act of notice is only extinguishment of obligation of employee and does not constitute an independent/voluntary act. It was held that notice pay recovery arising out of breach of condition and is not a benefit to the employer. Accordingly, there is no supply of service. Furthermore, no consideration exists since any consideration should have a direct nexus to the voluntary act of supply. Moreover, no benefit accrues to the employer rather, he has suffered due to sudden exit of the employee. Furthermore, it was stated that the aforesaid transaction does not comes under the ambit of business. The said transaction is not covered under Schedule III of CGST Act, 2017 and Schedule II of CGST Act, 2017 as well since it does not constitute as supply. Reliance was placed on Section 66E(e) of the Finance Act, 1994 and para 2.9.3 of “Taxation of Services: An Education guide” issued by CBEC dated 20th June, 2012. Reference was made to decision of Madras High Court in the case of GE T & D India Limited Versus Deputy Commissioner of C. Ex., Chennai (2020 (35) G.S.T.L. 89 (Mad.)). The divergent views delivered by the members of the bench created a problematic situation for the appellant since as per Section 101(3) of CGST Act, 2017, in case of advance ruling wherein divergent views are delivered it shall be considered as if no advance ruling is sought by the appellant. This harms the basic intention behind implementing concept of advance ruling. While on the other hand if the appeal is preferred in CESTAT or in any court and divergent opinion is delivered, the said matter is referred to third member to decide the matter through majority. This is done to impart fairness in judgment. The Government should make amendment and bring concept of Advance Ruling as well on the same line to do justice with the basic purpose of setting up Authority for Advance Ruling and to avoid unnecessary and unwanted litigations in future. No decision on divergent views will end the process for the applicant. However, he does not any role on the above divergent view. Everyone knows that one members is from CGST and other is from SGST and there is bound to be conflicts between these members. But ending the process on such difference of opinion does not result into justice to applicant. No decision after spending so much time and money is helpless situation for the applicant. The matter should be referred to independent third member and decision should be given to the applicant. The GST council should consider it and amend the provisions accordingly.

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GST Update No 168 on Notice pay recovery- Divergent Views

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