Liquidated damages are compensatory, not taxable consideration, so service tax and related demands could not be sustained.

Liquidated damages and penal charges recovered from vendors for delayed delivery were held not to constitute consideration for any taxable service. The Tribunal treated such recoveries as compensatory amounts for breach of contract, not payment for activity carried out for another or for tolerating breach merely because the contract contained a penal clause. Relying on the settled position and the Board circular, it held that service tax was not leviable on the amounts recovered, and the connected demand of interest, late fee and penalties also could not survive. The revenue appeal was dismissed and the relief granted to the assessee was upheld.

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Issues: Whether service tax was leviable on amounts recovered as penalties or liquidated damages from vendors for delayed delivery, and whether the consequential demand of tax, interest, late fee and penalties could be sustained.

Analysis: The Tribunal followed the settled view that liquidated damages or penal charges recovered for breach of contractual terms are not consideration for any service. Such recovery is compensatory in nature and does not amount to an activity carried out for another for consideration, nor does it amount to toleration of breach merely because a contract contains a penal clause. The Tribunal also noted the Board circular clarifying that liquidated damages cannot be treated as consideration for tolerating breach or non-performance of contract. Since the core levy itself was unsustainable, the connected demand of interest, late fee and penalties also could not survive.

Conclusion: Service tax was not payable on the liquidated damages or penalties recovered, and the demand along with interest, late fee and penalties was held unsustainable. The revenue appeal was dismissed and the relief granted to the assessee was upheld.

Ratio Decidendi: Contractual liquidated damages recovered for breach or non-performance are compensatory and do not constitute consideration for a taxable service, including any deemed service of tolerating an act.

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