Contractual damages and penalties for breach are not service consideration unless the agreement specifically provides for tolerance or refraining.

Amounts recovered as earnest money forfeiture, liquidated damages, and contractual penalties for breach or non-performance were held not to constitute consideration for agreeing to refrain from an act, tolerate an act or situation, or do an act under section 66E(e) of the Finance Act, 1994. The recoveries were treated as consequences of contractual default, not as payment for an independent service, because the contracts did not specifically create an arrangement to tolerate default in return for consideration. Mere breach of contract with consequential damages was therefore distinguished from a taxable service, and the service tax demand on the contractual recoveries was held unsustainable.

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Issues: Whether amounts recovered as earnest money deposit forfeiture, liquidated damages, and contractual penalties for breach or non-performance of contract were taxable as consideration for agreeing to refrain from an act, tolerate an act or situation, or do an act under section 66E(e) of the Finance Act, 1994.

Analysis: The amounts were recovered on account of breach or non-performance of contractual obligations. Such recoveries were not shown to be consideration for any independent service, nor did the contracts specifically provide for an arrangement where the appellant agreed to tolerate the default or refrain from an act in return for consideration. The contractual penalty clauses operated as deterrents to secure performance and were distinguishable from consideration for a service. The reasoning was consistent with the settled view that there must be a clear nexus between the alleged service and the consideration, and that mere breach of contract with consequential damages does not by itself amount to a taxable service under section 66E(e).

Conclusion: The disputed recoveries were not exigible to service tax under section 66E(e) of the Finance Act, 1994, and the demand was unsustainable. The assessee succeeded.

Final Conclusion: The appellate order was set aside and the demand of service tax on the contractual recoveries did not survive.

Ratio Decidendi: Contractual damages or penalties recovered for breach or non-performance are not taxable as service consideration unless the agreement independently and specifically provides for refraining, tolerating, or doing an act in return for consideration.

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