Will compensation paid by an employee to an employer for resigning from service without giving requisite notice, fall under taxable service? CESTAT decodes

Customs, Excise & Service Tax Appellate Tribunal, Bangalore (CESTAT): The Coram of S.K. Mohanty (Judicial Member) and P. Anjani Kumar (Technical Member) reiterated that, any compensation paid by the employee to the employer for resigning from the service without giving the requisite notice, would not be termed as consideration for the contract of employment and as such, would not fall within the preview of taxable service.

Factual Background


Appellants in the present matter had collected a certain amount as ‘Notice Period Pay’ or ‘Bond Enforcement Amount; from their employees, who wanted to quit the job without notice or do not serve the organization for the prescribed period as per the terms of the employment contract.

Further, during the audit of records maintained by appellants, it was observed that the appellants did not pay service tax on the consideration received on account of ‘notice pay’ from the employees.

In view of the above, show cause proceedings were initiated against the appellants, which culminated into the adjudication order, wherein service tax demand of Rs 6,21,514 and Rs 3,43,561 along with interest was confirmed. Besides, the said order had imposed penalties of Rs 6,21,514 and Rs 34,256 under Sections 78 ibid and 76 ibid respectively.

On appeal against the above adjudication order, the Commissioner (Appeals) vide the impugned order upheld the adjudication orders.

On being aggrieved with the above order, appellants preferred the appeals before the Tribunal.

Analysis, Law and Decision


Tribunal expressed that the term ‘notice pay’ mentioned in the employment contract cannot be considered as a service, more specifically as a taxable service inasmuch as neither of the parties to the contract provided any service to each other.

Coram added that the amount received as compensation by the appellants cannot be equated with the term ‘consideration’ inasmuch as the latter is received for performance under the contract; whereas, the former is received, if the other part fails to perform as per the contractual norms.

Therefore, the impugned orders were set aside, and the appeal were allowed. [XL Health Corpn. India (P) Ltd. v. Commissioner of Central Tax, Final Order Nos. 20225 – 20226 / 2022, decided on 6-5-2022]


Advocates before the Tribunal:

Ravi Banthia & Madhuri Rau, CA: For the appellants

Rama Holla, Superintended (AR): For the respondent

One comment

  • The judgement is highly appreciable. The interpretation is really worth keeping in mind for future reference and guidances.

Join the discussion

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.