Pure agent reimbursements and liquidated damages fall outside service tax where no taxable consideration or toleration service exists.

Service tax was not leviable on amounts routed through a nodal agency to vendors for execution of State IT projects, because the agency acted only as a pure agent: it separately taxed its supervisory service charges, while the vendor payments were reimbursements borne by the State Government and not consideration for any service rendered by the agency. Service tax was also not leviable on liquidated damages recovered for contractual breach, as such recoveries arise from default under the contract and do not constitute consideration for tolerating an act or for any independent taxable service. The demand failed on both components and the appeal succeeded.

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Issues: (i) whether service tax was leviable on the gross amount received by the appellant for execution of IT projects for the Government of Rajasthan; (ii) whether service tax was leviable on amounts deducted or received by way of liquidated damages for breach of contractual terms.

Issue (i): whether service tax was leviable on the gross amount received by the appellant for execution of IT projects for the Government of Rajasthan.

Analysis: The appellant functioned as a nodal agency for supervising and monitoring implementation of State IT projects, while the vendors executed the projects and were paid the project cost. The appellant separately recovered service charges for its supervisory role and discharged tax on that consideration. The amounts routed through the appellant for payment to vendors were reimbursements borne by the State Government and were not received by the appellant as consideration for any service rendered by it. Since the appellant acted as a pure agent in relation to the vendor payments, and the amount paid to vendors was not received by it for such service, the gross amount could not form part of the taxable value. Reliance was also placed on the invalidity of rule 5(1) of the valuation rules and the satisfaction of the conditions of rule 5(2).

Conclusion: Service tax was not leviable on the gross amount received for payment to vendors, and this issue was answered in favour of the assessee.

Issue (ii): whether service tax was leviable on amounts deducted or received by way of liquidated damages for breach of contractual terms.

Analysis: Liquidated damages arise from breach of contract and operate as a contractual safeguard, not as consideration for any independent activity carried out for another person. The agreements did not specify any distinct obligation to tolerate a defaulting act in return for consideration. The statutory concept of service under section 65B(44) and the deeming fiction in section 66E(e) do not cover such penal recoveries, and the circular cited by the Tribunal also clarified that liquidated damages are not consideration for tolerating breach or non-performance. Accordingly, the amounts recovered as liquidated damages could not be treated as taxable consideration.

Conclusion: Service tax was not leviable on liquidated damages, and this issue was answered in favour of the assessee.

Final Conclusion: The demand could not be sustained on either the vendor-payment component or the liquidated damages component, so the impugned order was set aside and the appeal succeeded.

Ratio Decidendi: Amounts paid by a State Government through an implementing nodal agency to vendors for project execution are reimbursements outside the taxable value when the agency acts as a pure agent, and recoveries in the nature of liquidated damages for contractual breach are not consideration for a taxable service or a deemed service of toleration.

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