Liquidated damages for delay are not taxable consideration unless tied to an independent agreement to tolerate an act.

Contractual liquidated damages or penalty recovered from suppliers and contractors for delay or non-performance are not consideration for a declared service under section 66E(e) of the Finance Act, 1994 unless there is an independent contractual arrangement creating a clear nexus with an agreement to do, refrain from doing, or tolerate an act. Mere recovery of damages for breach or delay does not by itself amount to taxable consideration, and the CBIC circular and earlier Tribunal decisions were treated as consistent with that view. On that basis, such recoveries were not liable to service tax.

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Issues: Whether liquidated damages or penalty recovered from suppliers and contractors for delayed completion of work constituted consideration for a declared service and was liable to service tax under section 66E(e) of the Finance Act, 1994.

Analysis: The recoveries were made under contractual penalty clauses for delay or non-performance and were not part of the service charges already paid on the invoices. Such amounts were not shown to be payable in return for any independent agreement to tolerate an act or situation, nor did they establish the necessary and sufficient contractual nexus required to treat them as consideration for a taxable service. The issue was treated as settled by earlier Tribunal decisions and was also consistent with the CBIC circular clarifying that mere recovery of damages for breach or delay does not, by itself, amount to consideration for a declared service.

Conclusion: The liquidated damages and penalty recoveries were not taxable as consideration under section 66E(e) of the Finance Act, 1994, and the service tax demand and penalties could not survive.

Ratio Decidendi: Contractual recovery of liquidated damages for delay or breach is not consideration for a declared service unless there is an independent contractual arrangement creating a clear nexus between the payment and an agreement to do, refrain from doing, or tolerate an act.

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