Compensatory relinquishment charges are not consideration for tolerating an act, and are outside service tax under section 66E(e).

Re-linquishment charges recovered for premature surrender of access rights to the inter-state transmission system were held not to be consideration for the declared service of tolerating an act under section 66E(e) of the Finance Act, 1994. The record showed that the payment was compensatory in nature, linked to non-performance or early exit, rather than an express or implied agreement to tolerate an act in return for consideration. Penal or compensatory recoveries arising from breach or contractual non-performance are conditions of the contract, not taxable consideration for a service. Accordingly, the charges were not liable to service tax.

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Issues: Whether relinquishment charges collected for premature surrender of access rights to the inter-state transmission system are consideration for the declared service of tolerating an act under section 66E(e) of the Finance Act, 1994 and hence liable to service tax.

Analysis: The charge was treated in the adjudication order as standalone consideration for tolerating non-performance, but the record showed that the amount was recovered as compensation linked to premature relinquishment of transmission access. A payment in the nature of compensation or damages for breach or non-performance is not, by itself, consideration for a service. Liability under section 66E(e) arises only where there is an express or implied agreement to tolerate an act or situation in return for consideration, and not where money is recovered merely because a contractual obligation is not performed. The reasoning was consistent with the principle that penal or compensatory recoveries are conditions of the contract and not consideration for the contract.

Conclusion: The relinquishment charges were not consideration for a declared service and were not taxable under section 66E(e) of the Finance Act, 1994.

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