Contractual compensation and liquidated damages are not consideration for tolerating an act under service tax law.

Contractual forfeiture, security deposit recovery, penalty for short-lifting, demurrage and liquidated damages were examined for taxability as a declared service under section 66E(e) of the Finance Act, 1994. The Tribunal applied its earlier view that compensation for breach of contract is not, by itself, consideration for an agreement to tolerate an act or situation, and the revenue identified no distinguishing facts to depart from that reasoning. The argument that the earlier decision should be ignored because an appeal was pending before the Supreme Court was rejected, and the impugned service tax demand was set aside.

---

---

Issues: Whether forfeiture of earnest money deposit, security deposit, penalty for short-lifting, demurrage, and liquidated damages recovered under various contracts are taxable as a declared service under section 66E(e) of the Finance Act, 1994 as consideration for tolerating an act.

Analysis: The dispute turned on whether amounts recovered from buyers, contractors, and suppliers for breach of contractual terms could be treated as consideration for an agreement to tolerate an act or situation. The Tribunal noted that the facts were identical to those considered in an earlier decision involving the same class of transactions, where it had been held that compensation, forfeiture, and liquidated damages do not by themselves constitute consideration for a service of toleration. The revenue did not bring any acceptable distinguishing feature to dislodge that view. The contention that the earlier decision should be disregarded because its appeal was pending before the Supreme Court was rejected, and the Tribunal applied its earlier reasoning.

Conclusion: The amounts recovered by way of forfeiture, penalty, and liquidated damages were not taxable under section 66E(e) of the Finance Act, 1994. The impugned order was set aside and the appeal was allowed.

Ratio Decidendi: Contractual compensation, forfeiture, penalty, and liquidated damages are not, without more, consideration for a taxable service of tolerating an act under section 66E(e) of the Finance Act, 1994.

---