Compensation for under-utilised capacity is not consideration for a declared service and falls outside service tax liability.

Ex-gratia job charges received by a job worker for under-utilisation of manufacturing capacity were treated as compensation arising from the commercial arrangement, not as consideration for a declared service under the Finance Act, 1994. Because the amount was paid for loss caused by the principal manufacturer's failure to use the agreed capacity, and not for any agreement to tolerate an act, refrain from an act, or do an act, it fell outside the declared-service provisions. The service tax demand, with interest and penalties, was therefore not sustainable.

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Issues: Whether ex-gratia job charges received by a job worker for under-utilisation of manufacturing capacity were taxable as consideration for a declared service under the Finance Act, 1994.

Analysis: The receipt arose from the commercial arrangement between the parties and was payable as compensation where the principal manufacturer did not utilise the agreed manufacturing capacity. Such amount was not paid in consideration of any agreement to refrain from an act, tolerate an act or situation, or do an act. The charges were in the nature of compensation for loss arising from unintended under-utilisation and not consideration for any service within the meaning of the declared-service provisions.

Conclusion: The ex-gratia job charges were not taxable as service consideration under the declared-service provision.

Final Conclusion: The demand of service tax, interest, and penalties could not be sustained, and the assessee succeeded on merits.

Ratio Decidendi: Compensation received for loss or under-utilisation of capacity, without any underlying obligation to tolerate an act or situation, does not constitute consideration for a declared service.

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