Liquidated damages are not taxable consideration for tolerating breach absent a real service, and extended limitation needs wilful suppression.

Liquidated damages recovered from vendors for breach of contract were treated as penalty for non-compliance, not as consideration for any activity undertaken for another person, so they were not taxable as a declared service by way of tolerating breach. The demand also failed on limitation because the assessee had filed ST-3 returns, records were available to departmental audit, and the material did not show wilful suppression or an intent to evade tax. The extended period was therefore unavailable, and the demand was held unsustainable.

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Issues: (i) Whether liquidated damages recovered from vendors for breach of contractual obligations constituted consideration for a declared service taxable under section 66E(e) of the Finance Act, 1994. (ii) Whether the extended period of limitation was invocable in the absence of wilful suppression or intent to evade tax.

Issue (i): Whether liquidated damages recovered from vendors for breach of contractual obligations constituted consideration for a declared service taxable under section 66E(e) of the Finance Act, 1994.

Analysis: The amount was recovered as penalty or liquidated damages for non-compliance with contractual terms. Such recovery was not shown to be consideration for any activity undertaken for another person. The contractual stipulation to safeguard commercial interests did not amount to an agreement to tolerate breach for consideration. The reasoning adopted in the binding precedent on liquidated damages was followed, along with the statutory concepts of "service" and "consideration".

Conclusion: The amount recovered as liquidated damages was not taxable as consideration for a declared service, and service tax was not payable.

Issue (ii): Whether the extended period of limitation was invocable in the absence of wilful suppression or intent to evade tax.

Analysis: The appellant had regularly filed ST-3 returns, the records were under departmental audit, and the relevant documents were already available to the department. The materials did not establish wilful suppression or an active intent to evade tax, which are necessary to justify invocation of the extended period. The circular relied upon also reflected that extended limitation requires clear evidence of such ingredients.

Conclusion: The extended period of limitation was not validly invoked.

Final Conclusion: The demand was unsustainable in law, the impugned order was set aside, and the appellant succeeded on merits as well as on limitation.

Ratio Decidendi: Liquidated damages recovered for breach of contract are not consideration for a taxable service unless there is a real, identifiable service of tolerating the breach for consideration; extended limitation requires wilful suppression or intent to evade tax.

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