Contractual damages for delay or breach are not declared services when no agreement to tolerate default exists.

Amounts recovered under contractual clauses for delayed supply, non-conforming supply, or delay in execution of work are not taxable as declared services unless the agreement specifically creates an arrangement to tolerate, refrain from, or do an act for consideration. A contract for supply of coal or execution of work, with compensation clauses for breach or delay, merely safeguards performance and does not amount to an independent service under section 65B(44) or section 66E(e) of the Finance Act, 1994. The recovered sums were therefore not consideration for any service, and service tax was not leviable.

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Issues: Whether amounts recovered by a thermal power station from suppliers and contractors for delayed supply, non-conforming supply, or delay in execution of work constitute a declared service under section 66E(e) of the Finance Act, 1994 and are liable to service tax.

Analysis: Liability under section 66E(e) arises only where there is an agreement, express or implied, under which a person, for consideration, agrees to refrain from an act, tolerate an act or situation, or do an act. The statutory definition of service under section 65B(44) requires an activity for another for consideration, and the declared service provision cannot be invoked merely because money is recovered under contractual clauses dealing with breach or delay. The agreement in the present case was for supply of coal and execution of work, and the compensation clauses operated as safeguards for non-performance rather than as consideration for tolerating default. The amounts deducted from suppliers and contractors were therefore not consideration for any independent service. The reasoning is consistent with the view that liquidated damages, compensation, and similar contractual recoveries are not taxable merely because they flow from one party to another; there must be a specific arrangement to tolerate the act or situation in return for payment.

Conclusion: The recovered amounts do not fall within section 66E(e) and service tax was not leviable on them.

Ratio Decidendi: A contractual recovery for breach, delay, or non-performance is not a declared service unless the agreement specifically contemplates toleration or abstention for consideration.

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