Quality claim treated as declared service under act of tolerance, making the receipt liable to service tax.

A quality claim received for deficient goods was treated as compensation for tolerating the supply of poor-quality material. On that basis, the receipt was regarded as a declared service falling within the act of tolerance under section 66E(e) of the Finance Act, 1994, and service tax was held payable. The challenge to the demand therefore failed.

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Issues: Whether the amount received by the assessee as a quality claim for poor quality goods was liable to service tax as a declared service under section 66E(e) of the Finance Act, 1994.

Analysis: The record showed that the supplier issued a credit note describing the payment as a quality claim for deficient goods. The amount was, therefore, treated as compensation received for tolerating supply of poor quality material. On that basis, the receipt was held to fall within the declared service of an act of tolerance.

Conclusion: The amount was held taxable under section 66E(e) of the Finance Act, 1994 and the challenge to the demand failed.

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