Facts of the Case

M/s Manappuram Finance Ltd., a non-banking finance company and an assessee under the GST regime, filed the writ petition challenging the appellate order to the extent it held that the petitioner was liable to pay GST on notice pay received from its former employees. The original authority had rejected the petitioner’s applications seeking refund of GST paid on notice pay recovered from erstwhile employees, and the appellate authority upheld such rejection.

The petitioner approached the Kerala High Court under Article 226 of the Constitution of India on the ground that the GST Appellate Tribunal had not been constituted and, therefore, no effective appellate remedy was available. The core dispute concerned whether notice pay recovered from employees leaving employment was taxable under GST as consideration for a service of “agreeing to tolerate an act or a situation.”

Issues Involved

  1. Whether GST is payable on notice pay recovered by an employer from erstwhile employees.
  2. Whether such recovery constitutes consideration for a taxable supply or service of “agreeing to tolerate an act or a situation” under the GST law.
  3. Whether CBIC Circular No. 178/10/2022-GST dated 03.08.2022, clarifying the taxability of amounts recovered from employees, is binding on the GST Department.
  4. Whether the benefit of the CBIC Circular can be extended to transactions and refund claims relating to periods prior to its issuance.
  5. Whether a beneficial or clarificatory circular can operate retrospectively.
  6. Whether the writ petition under Article 226 was maintainable when the GST Appellate Tribunal had not yet been constituted.
  7. Whether rejection of the petitioner’s refund applications for GST paid on notice pay could legally survive after issuance of the CBIC clarification.

Petitioner’s Arguments

The petitioner contended that CBIC Circular No. 178/10/2022-GST dated 03.08.2022 specifically clarified that amounts recovered by an employer through forfeiture of salary or recovery of bond amounts when employees leave employment before the agreed minimum period are not consideration for tolerating an act or situation.

It was argued that such amounts are recovered to discourage premature quitting and deter non-serious employees and not because the employer agrees to tolerate the employee’s act. The employee receives nothing in return against payment of such amount. Consequently, notice pay recovered from employees cannot be treated as consideration for any taxable supply.

The petitioner further submitted that the Circular was beneficial and clarificatory in nature and should apply to past transactions as well. Reliance was placed on Suchitra Components Ltd. v. Commissioner of Central Excise, (2006) 12 SCC 452, for the proposition that a beneficial circular should be applied retrospectively.

The petitioner also relied upon 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, and Madhu Silica Pvt. Ltd. v. Commissioner of Income Tax and Another, (1997) 227 ITR 350, to contend that departmental circulars of this nature are binding upon the tax authorities.

Further reliance was placed on GE T & D India Ltd. v. Deputy Commissioner of Central Excise, 2020 (35) G.S.T.L. 89 (Mad.), wherein the Madras High Court considered the issue of notice pay received from employees and held, in the service tax context under the Finance Act, 1994, that such receipt did not amount to rendition of service.

Respondent’s Arguments

The respondent Department contended that the writ petition was not maintainable merely because the GST Appellate Tribunal had not been constituted.

It was argued that the Central Goods and Services Tax (Ninth Removal of Difficulties) Order, 2019 clarified that the limitation period for filing an appeal before the GST Appellate Tribunal would commence only from the date of constitution of the Tribunal. Therefore, according to the Department, the petitioner could await constitution of the Tribunal.

The Department further submitted that the impugned appellate order merely upheld rejection of refund claims and that there was no tax demand against the petitioner. Hence, no immediate prejudice warranted exercise of extraordinary writ jurisdiction.

It was also contended that whether CBIC Circular No. 178/10/2022-GST would apply retrospectively was a matter to be examined by the GST Appellate Tribunal with reference to the facts and terms of the Circular.

The respondents emphasised that the Circular was issued approximately two and a half months after the appellate order and argued that its subsequent issuance did not automatically advance the petitioner’s case.

Court Order / Findings

The Kerala High Court held that the petitioner was entitled to succeed.

The Court found that CBIC Circular No. 178/10/2022-GST specifically dealt with the precise controversy arising in the case. The Circular clarified that money received by the petitioner as notice pay from erstwhile employees was not a taxable transaction for purposes of GST law.

The Court held that the principles laid down by the Supreme Court in Navnit Lal C. Javeri and followed in K.P. Varghese constituted binding precedent for the proposition that circulars of this nature are binding on the Department and that departmental officers cannot adopt a view contrary to the stipulations contained in such circulars.

The Court further held that the mere fact that the Circular was issued after the first appellate authority’s order was no reason to deny its benefit to the petitioner. Significantly, the Court found that the Circular only clarified the existing law. Therefore, the question of retrospective effect did not strictly require separate determination.

The High Court additionally observed that, even otherwise, in light of Suchitra Components Ltd. v. Commissioner of Central Excise, a circular in the nature of the relevant CBIC Circular would have to be deemed applicable retrospectively.

On the issue of alternative remedy, the Court rejected the Department’s objection. It held that the GST Appellate Tribunal was yet to be constituted and that the fact that limitation would commence only after constitution of the Tribunal was “no solace” to the petitioner. Accordingly, the petitioner was entitled to invoke the writ jurisdiction of the High Court under Article 226 of the Constitution of India.

Consequently, the writ petition was allowed. The impugned appellate order and all orders rejecting the petitioner’s refund applications for GST paid on notice pay received from employees were quashed. The refund applications were restored to the file of the first respondent for reconsideration in accordance with the findings contained in the judgment.

Important Clarification

The judgment provides an important clarification that notice pay recovered from former employees is not taxable merely by characterising the recovery as consideration for “tolerating” premature cessation of employment.

The essential reasoning is that the employer does not recover such amount as consideration for providing any service to the employee. The recovery is intended to discourage premature resignation, protect organisational interests, and deter breach of agreed employment conditions. The employee receives no reciprocal benefit from the employer against such payment.

The Court also clarified an important principle concerning CBIC circulars: where a circular explains or clarifies the existing legal position, its benefit cannot be denied merely because the circular was issued after the impugned adjudication or appellate order.

Further, where the statutory GST Appellate Tribunal is not constituted, the mere preservation of a future right of appeal through extension or postponement of limitation does not necessarily provide an effective present remedy so as to bar the High Court’s writ jurisdiction under Article 226.

Sections / Legal Provisions Involved

Section 7 of the CGST Act, 2017 — Scope of “supply” and requirement that a taxable transaction must fall within the statutory concept of supply.

Schedule II to the CGST Act, 2017 — Relevant in the context of the alleged service of agreeing to the obligation to refrain from an act, tolerate an act or situation, or do an act.

Section 54 of the CGST Act, 2017 — Refund of tax, relevant to the petitioner’s applications seeking refund of GST paid on notice pay recoveries.

Article 226 of the Constitution of India — High Court’s writ jurisdiction, invoked because the GST Appellate Tribunal had not been constituted.

CBIC Circular No. 178/10/2022-GST dated 03.08.2022 — Clarification regarding taxability of amounts recovered on account of forfeiture of salary or bond amount where an employee leaves employment before the agreed minimum period.

Central Goods and Services Tax (Ninth Removal of Difficulties) Order, 2019 — Relied upon by the Department concerning commencement of limitation for appeals to the GST Appellate Tribunal after its constitution.

Link to download the order -

https://mytaxexpert.co.in/uploads/1783068527_391compressed.pdf 

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