Notice Pay Collected from Employees Not a Taxable Service: Analysis of CESTAT Delhi Ruling in Balaji Medical & Diagnostic Research Centre Vs Principal Commissioner
1. Background and Context
The decision in Balaji Medical & Diagnostic Research Centre Vs Principal Commissioner (CESTAT Delhi) deals with an important recurring issue under the service tax regime: whether amounts recovered by an employer from employees as “notice pay” for premature resignation can be subjected to service tax as consideration for a service, including as a “declared service” under Section 66E(e) of the Finance Act.
The assessee in this case operated a hospital under the name “Max Super Speciality Hospital” in the Delhi NCR region and was registered with the Service Tax authorities for its medical and related taxable services. During a departmental audit, various observations were made regarding non-payment of service tax on certain receipts, leading to issuance of two show cause notices covering different periods and heads of income.
While a substantial demand on account of revenue sharing with consulting doctors was dropped at the adjudication stage, a relatively smaller demand pertaining to service tax on notice pay recovered from employees who left employment without serving the stipulated notice period was confirmed. The assessee challenged this surviving portion of the demand before CESTAT Delhi.
2. Facts in Brief
2.1 Nature of Services and Audit Findings
- The assessee is engaged in providing taxable services (primarily medical services) through its hospital “Max Super Speciality Hospital” in Delhi NCR.
- An audit of the assessee’s records resulted in the department identifying the following issues:
- Alleged non-payment of service tax on revenue share retained by the hospital out of payments to consulting doctors.
- Issues relating to fee for service plan.
- Alleged non-payment of service tax on notice pay recovered from outgoing employees.
2.2 Show Cause Notices and Demands
Two show cause notices dated 19.04.2016 and 17.04.2018 proposed demands aggregating to Rs. 46,54,048/- for the period July 2012 to March 2016, broken up under the following heads:
Revenue Sharing with Consulting Doctors under “Business Support Service”
Service Tax: Rs. 3,53,59,075/-for FYs 2010-11 to 2014-15 (SCN dated 19.04.2016).Service Tax: Rs. 1,09,66,554/-for FY 2015-16 (SCN dated 17.04.2018).
Notice Pay Recovered from Employees
Service Tax: Rs. 3,38,472/-for FYs 2010-11 to 2014-15 (SCN dated 19.04.2016).Service Tax: Rs. 2,90,857/-for FY 2015-16 (SCN dated 17.04.2018).
Proportionate interest and penalties were also proposed in both notices.
2.3 Adjudication Outcome
By order-in-original No. 01-02/PK/GST/DE/2018-19 dated 07.04.2018, the Adjudicating Authority:
- Dropped the major service tax demand relating to revenue sharing with consulting doctors amounting to Rs. 4,59,47,462/- (
Rs. 3,53,59,075/- + Rs. 1,09,66,554/-). - Confirmed the service tax demand of Rs. 6,29,329/- (
Rs. 3,38,472/- + Rs. 2,90,857/-) on amounts recovered as notice pay from ex-employees.
The assessee accepted the dropping of the revenue share demand but contested the demand on notice pay before CESTAT Delhi.
3. Issue Before the Tribunal
The Tribunal noted that only one issue remained in dispute in the appeal:
Whether the amount collected by the employer from employees as “notice pay” upon premature termination/resignation from employment constitutes consideration for a taxable service, including as a “declared service” under
Section 66E(e)of the Finance Act, such that service tax can be levied on such recoveries.
No dispute survived on the revenue-sharing issue, as the department itself had dropped that entire demand at the adjudication stage.
4. Assessee’s Contentions
Counsel for the assessee advanced the following principal arguments: