Contractual penal recoveries are not consideration for tolerating breach and fall outside declared service under the Finance Act.

Contractual recoveries such as liquidated damages, forfeiture of security deposits, fines and penalties for delay or breach were treated as penal clauses intended to protect commercial interests, not as consideration for any independent promise to tolerate default. Reading the agreement as a whole, the Tribunal found no separate service of toleration and held that the receipts did not fall within declared service under section 66E(e) of the Finance Act, 1994. It further applied the settled view that, without an independent agreement to tolerate, refrain from, or do an act for consideration, no taxable service exists under section 65B(44). The demand based on toleration of an act was therefore unsustainable and the impugned order was set aside.

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Issues: Whether amounts recovered as liquidated damages, forfeiture of security deposits, fines and penalties for delay or breach by contractors constitute consideration for tolerating an act and therefore fall within the scope of a declared service under section 66E(e) of the Finance Act, 1994.

Analysis: The contractual receipts were found to be penal clauses intended to safeguard commercial interests and to deter breach, not consideration for any independent promise by the appellant to tolerate delay or default. On a reading of the agreement as a whole, the intention of the parties was the supply of goods or services, not the creation of any separate service of toleration. The Tribunal followed the settled view that such recoveries do not amount to consideration for a taxable service, and that no service existed within the meaning of section 65B(44) of the Finance Act, 1994.

Conclusion: The recovery of penalty-related amounts was not taxable as a declared service, and the issue was decided in favour of the appellant.

Final Conclusion: The demand founded on the theory of toleration of an act could not be sustained, and the impugned order was set aside.

Ratio Decidendi: Contractual penal recoveries for delay or breach are not consideration for a taxable service unless there is an independent agreement to tolerate, refrain from, or do an act for consideration.

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