Declared service and reverse charge demands fail where breach recoveries, mining rents, conduit receipts, and administrative allocations lack service consideration.

Contractual adjustments and forfeiture of security deposit were not taxable as declared service consideration under section 66E(e), because the amounts arose from breach-related recovery and not from any independent agreement to tolerate default; the demand was set aside. Dead rent and surface rent paid to the State Government for mining rights were not taxable on reverse charge for the earlier period, as the relevant governmental service remained outside the tax net before 01.04.2016; that demand was also set aside. Sitting fees passed through the appellant for nominee directors were mere conduit receipts, and area development charges were only an administrative allocation, so neither constituted consideration for a taxable service; both demands failed, with consequential interest and penalty.

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Issues: (i) Whether amounts recovered as contractual adjustments and forfeiture of security deposit were taxable as consideration for a declared service under section 66E(e) of the Finance Act, 1994; (ii) Whether dead rent and surface rent paid to the State Government in connection with mining rights were taxable on reverse charge basis for the relevant period; (iii) Whether sitting fees routed through the appellant from joint venture companies in relation to nominee directors constituted taxable income for any service; (iv) Whether area development charges retained by the appellant were consideration for a taxable service rendered to the State Government.

Issue (i): Whether amounts recovered as contractual adjustments and forfeiture of security deposit were taxable as consideration for a declared service under section 66E(e) of the Finance Act, 1994.

Analysis: The amounts were recovered because contractors failed to lift the contracted quantity, violated contract conditions, or suffered forfeiture under penal clauses. The agreement was for supply and performance, not for the appellant to tolerate breach or default. A recovery made as deterrence for non-performance is distinct from consideration for an independent agreement to tolerate an act or situation. The circular issued by the Central Board of Indirect Taxes and Customs also recognised that taxability under section 66E(e) depends on a specific agreement to refrain from an act, tolerate an act, or do an act, with a direct nexus between the activity and consideration.

Conclusion: The demand on contractual adjustments and forfeiture amounts was not sustainable and was set aside in favour of the assessee.

Issue (ii): Whether dead rent and surface rent paid to the State Government in connection with mining rights were taxable on reverse charge basis for the relevant period.

Analysis: The taxable event is the provision or agreement to provide service. The mining rights agreement was executed on 02.01.2016, when the relevant governmental service was still within the negative list regime. Prior to 01.04.2016, services by Government to the extent covered by the negative list were not taxable. The later amendment excluding services to business entities operated only from 01.04.2016 onwards, and the liability could not be fastened retrospectively for the earlier period.

Conclusion: The demand on dead rent and surface rent was not sustainable and was set aside in favour of the assessee.

Issue (iii): Whether sitting fees routed through the appellant from joint venture companies in relation to nominee directors constituted taxable income for any service.

Analysis: The amount was credited to the appellant only as a conduit and was not retained as consideration for any service rendered by the appellant. The actual transaction was between the joint venture company and the directors. In the absence of a service rendered by the appellant against the amount received, the levy could not be sustained.

Conclusion: The demand on director sitting fees was not sustainable and was set aside in favour of the assessee.

Issue (iv): Whether area development charges retained by the appellant were consideration for a taxable service rendered to the State Government.

Analysis: The charges were allocated to the appellant for meeting administrative expenses under governmental orders. There was no identifiable service-provider and service-recipient relationship, nor any specific service performed by the appellant in exchange for the amount. The receipt therefore represented income or allocation, not consideration for a taxable service.

Conclusion: The demand on area development charges was not sustainable and was set aside in favour of the assessee.

Final Conclusion: The entire service tax demand, along with the consequential interest and penalty confirmed in the impugned order, failed on merits and the assessee obtained full relief.

Ratio Decidendi: A sum recovered as penalty or liquidated damages for breach of contract is not consideration for a declared service under section 66E(e) unless the agreement specifically creates an independent obligation to tolerate an act or situation and the consideration has a direct nexus with that obligation.

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