Contractual penalty recoveries are not taxable service consideration unless there is a bargained-for agreement to tolerate default.

Penal or compensatory recoveries for contractual breach are not consideration for a taxable service unless the agreement shows a bargained-for obligation to tolerate the act or situation. Cheque dishonour charges and late delivery charges were imposed to secure compliance and compensate default, not because the recipient agreed to provide a service or tolerate the breach for consideration. They therefore did not fall within the declared service of toleration under the Finance Act, 1994, and the service tax demand was unsustainable; interest and penalty were also set aside.

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Issues: Whether amounts recovered as cheque dishonour charges and late delivery charges constituted consideration for a taxable service under the Finance Act, 1994, and were liable to service tax as a declared service involving toleration of an act or situation.

Analysis: Service under Section 65B(44) of the Finance Act, 1994 requires an activity carried out for another for consideration. For the declared service under Section 66E(e), there must be a flow of consideration for agreeing to refrain from an act, tolerate an act or situation, or do an act. Penal recoveries such as cheque dishonour charges and late delivery charges are imposed to secure contractual compliance and compensate default, not because the recipient undertakes any service or agrees to tolerate the default as a bargain for consideration. Such amounts are therefore not consideration for service and do not fall within the taxable ambit of Section 66E(e).

Conclusion: The recovered amounts were not taxable as service tax under the declared service provision, and the demand was unsustainable.

Final Conclusion: The appeal succeeded and the demand, interest and penalty were set aside.

Ratio Decidendi: Penal or compensatory recoveries arising from contractual breach are not consideration for a service unless the agreement itself shows a bargained-for obligation to tolerate the act or situation for consideration.

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