15.12.2022: Notice Pay Received From The Erstwhile Employees Would Not Be Liable To GST – Circulars Issued Would Be Applicable Retrospectively – Refund Allowed – Kerala High Court

The Hon’ble High Court of Kerala vide its order dated 07.12.2022 in the matter of M/s Manappuram Finance Ltd. Vs. Assistant Commissioner, Central Tax and Excise, Thrissur Joint Commissioner (Appeals), Kochi in WP (C) No. 27373 of 2022, held that Notice pay received from the erstwhile employees would not be liable to GST and thereby allowed the refund filed by the assessee for the amount already paid by it as tax.  It was also held that the Circular issued in this regard, being clarificatory in nature would be applicable retrospectively.

The Petitioner filed the writ petition before the Hon’ble High Court challenging the appellate authority order, whereby it was held that the petitioner is liable to pay service tax on notice pay received from the former employees, and with the said view the refund claim filed by the petitioner was rejected.

Petitioner’s Submissions: –

  • It was submitted on the behalf of the petitioner that issue involved in the matter ‘whether the petitioner is liable to pay GST on notice pay received from erstwhile employees’ has already been consider by CBIC vide Circular bearing No. 178/10/2022-GST dated 03.08.2022, wherein it was clarified that ‘The said amounts are recovered by the employer not as a consideration for tolerating the act of such premature quitting of employment but as penalties for dissuading the non-serious employees from taking up employment and to discourage and deter such a situation. Further, the employee does not get anything in return from the employer against payment of such amounts. Therefore, such amounts recovered by the employer are not taxable as consideration for the service of agreeing to tolerate an act or a situation.’
  • That with the issuance of the aforesaid Circular, now it is clear that the petitioner is not required to pay any GST on notice pay received from employees. Further, it was submitted that though this circular was issued on 03.08.2022, it would be applicable on all the past transactions, as it is settled law that the beneficial circular must be applied retrospectively.  To support its contention, reliance was placed on the judgment of Hon’ble Supreme Court in the matter of in Suchitra Components Ltd. v. Commissioner of Central Excise; (2006) 12 SCC 452.
  • Further the reliance was also placed on the judgment of Navnit Lal C. Javeri v. K.K. Sen; 1965 (56) ITR 198, K.P. Varghese v. Income Tax Officer,Ernakulam and another; (1981) 4 SCC 173, Madhu Silica Pvt. Ltd v. Commissioner of Income Tax and another; (1997) 227 ITR 350, to contend that Circulars issued are binding on the GST Department.
  • That on merits, reliance was placed on the judgment of Madras High Court in GE T&D India Ltd. Vs. Deputy Commissioner of Central Excise – 2020 (35) G.S.T.L. 89 (Mad.), wherein the similar issued was considered and it was held that ‘notice pay received from employees does not amount to rendition of service for the purposes of the Finance Act, 1994.’

Respondents’ Submissions: –

  • On the other hand, it was submitted on the behalf of the respondents that the present Writ petition is not maintainable before this Court merely because GST Appellate Tribunal has not been constituted. The petitioner can very well wait for the constitution of the appellate tribunal for the adjudication of the issue involved.
  • Further referring to facts of the case and terms of the Circular, it was submitted that ‘Whether the Circular referred would be applicable retrospectively is a matter to be considered and decided by the Tribunal, and it is not open to the petitioner to now contend this before this Court under Article 226 of the Constitution.
  • It was submitted that the said Circular has been issued only 2 ½ months after the issuance of the impugned and therefore, issuance of Circular does not assist the case of the petitioner in any manner.

Held: –

  • The Hon’ble Court after considering the submissions made, facts of the case and the circular referred, was of the view that the petitioner is entitled to succeed in the present matter.
  • It was found by the Hon’ble Court that Circular referred on the behalf of the petitioner, covers the issue involved in this case and clarifies that ‘the amount of money received by the petitioner as notice pay from erstwhile employees is not a taxable transaction for the purposes of the GST laws’.
  • Further, it has been rightly contended on the behalf of the petitioner that the decisions of the Supreme Court in Navnit Lal (supra) which was applied and followed in P. Varghese (supra) are binding precedents for the proposition that Circulars of the nature, as referred in the present case, are binding on the Department and no officer can take a view contrary to stipulations contained in such circulars.
  • The Hon’ble Court took note of, and applying the ratio laid down in the judgment of P. Varghese to the present case, found that instant case there is no reason for the Appellate Authority to hold that the petitioner is not entitled to the benefits of the referred Circular.
  • Further, it was found that the Circulars being clarificatory in nature and only clarifies the existing law, would be applicable retrospectively. Also, the Hon’ble Supreme Court in Suchitra Components Ltd. (supra) has laid down that Circulars of such nature will have to be deemed to apply retrospectively.
  • Thereafter, it was found by the Hon’ble Court that the contention raised on the behalf of the respondents that ‘the petitioner has an effective alternative remedy before the GST Appellate Tribunal’ does not appeal to this Court, as the GST Tribunal is yet to be constituted. Therefore, the petitioner is entitled to exercise the jurisdiction of this Court under Article 226 of the Constitution of India to challenge the orders impugned in this writ petition.

The Hon’ble Court with the above findings, allowed the writ petition by setting aside and quashing the orders rejecting the application of the petitioner for refund of GST paid on notice pay received by the petitioner from its employees.  The applications filed by the petitioner for refund shall stand restored to the file of the 1st respondent, who shall reconsider the matter, having regard to the findings contained in this judgment.


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