Contractual breach recoveries are not declared services when they are compensatory amounts rather than consideration for tolerating an act.

Contractual recoveries for breach are taxable as declared services only when they are consideration for agreeing to do, refrain from doing, or tolerate an act; compensation or penal recovery for breach is not such consideration. On that basis, notice pay recovered from employees for premature exit was held outside service tax because it arose from the employment contract as compensation for non-observance of notice period. Cancellation charges and room charge retention for cancellation or no-show were likewise treated as contractual compensatory amounts, not consideration for tolerating a default, and were held not liable to service tax.

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Issues: (i) Whether notice pay recovered from employees for non-observance of the stipulated notice period is liable to service tax; (ii) Whether cancellation charges and room charge retention arising from cancellation or no-show by customers are taxable as declared service under section 66E(e) of the Finance Act, 1994.

Issue (i): Whether notice pay recovered from employees for non-observance of the stipulated notice period is liable to service tax.

Analysis: The amount recovered on premature exit of employees arose from the employment contract and was in the nature of compensation for breach of the agreed notice period. Such recovery did not amount to an activity carried out for another for consideration, nor did it constitute any agreement to tolerate an act or forbearance service. The settled position, including the Board's clarification and prior decisions, is that notice pay is not consideration for a taxable service.

Conclusion: The demand on notice pay is not sustainable and is decided in favour of the assessee.

Issue (ii): Whether cancellation charges and room charge retention arising from cancellation or no-show by customers are taxable as declared service under section 66E(e) of the Finance Act, 1994.

Analysis: The amounts retained on cancellation or no-show were contractual penal or compensatory amounts linked to booking arrangements, not consideration for agreeing to tolerate a default or for any independent service. The taxable event under section 66E(e) requires a clear flow of consideration for the specific act of refraining from acting, tolerating an act, or doing an act, which was absent here. The retention of such amounts therefore did not attract service tax.

Conclusion: The demand on cancellation and room retention charges is not sustainable and is decided in favour of the assessee.

Final Conclusion: The impugned orders were set aside and the appeals were allowed, with the entire service tax demands on both notice pay and cancellation-related receipts held unsustainable.

Ratio Decidendi: A contractual recovery is taxable as a declared service only when it is itself consideration for an identified obligation to refrain from an act, tolerate an act, or do an act; compensation or penal recovery for breach of contract is not such consideration.

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