Liquidated damages for delayed performance are not consideration for declared services and remain outside service tax.

Liquidated damages recovered for delay in performing supply and service contracts are not consideration for a declared service where the contractual clause operates as a penal or compensatory mechanism to secure performance. Service tax under Section 65B(44) read with Section 66E(e) applies only if there is an activity for consideration and a specific agreement to refrain from an act, tolerate an act or situation, or do an act for consideration. A mere recovery of damages for breach does not satisfy that test. The amount collected for delayed performance is therefore outside the service tax net.

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Issues: Whether liquidated damages recovered for delay in performance of supply and service contracts constitute consideration for a declared service and are exigible to service tax.

Analysis: The recovery of liquidated damages arose from contractual clauses intended to secure performance of the agreement and not from any agreement by one party to tolerate a breach or to provide a service. For a charge under Section 65B(44) of the Finance Act, 1994 read with Section 66E(e) of the Finance Act, 1994, there must be an activity carried out for consideration and the agreement must specifically contemplate refraining from an act, tolerating an act or situation, or doing an act for consideration. The contractual stipulation for liquidated damages was held to be a penal or compensatory mechanism, not consideration for any taxable service. The Tribunal therefore treated the issue as covered by its earlier decision and followed that view.

Conclusion: Liquidated damages collected for delayed performance do not amount to consideration for a declared service and are not taxable under the service tax provisions.

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