Compensatory recoveries are not service consideration unless the contract specifically pays for tolerating a breach.

Recoveries from employees for non-completion of notice periods and from dealers or distributors for failure to meet sales targets are characterised as compensatory or penal, not as consideration for a taxable or declared service. The toleration of an act clause applies only where the contract specifically provides for an agreement to tolerate the relevant conduct and the payment is made for that tolerance. On that reasoning, notice pay recoveries and target shortfall recoveries fall outside service tax, and the demand on both categories of receipts is not sustainable.

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Issues: (i) whether amounts recovered by the employer from outgoing employees as notice pay for non-completion of the notice period constitute consideration for a taxable service; and (ii) whether amounts recovered for non-achievement of sales targets by dealers or distributors constitute consideration for a declared service under the service tax law.

Issue (i): whether amounts recovered by the employer from outgoing employees as notice pay for non-completion of the notice period constitute consideration for a taxable service.

Analysis: The relevant charging scheme taxes only an activity carried out for consideration, and the declared service of agreeing to tolerate an act applies only where the agreement specifically contemplates such activity and consideration. Amounts recovered as notice pay arise from the employment contract and are compensatory in nature; they do not represent consideration for any service rendered by the employer. The cited board guidance and the settled line of decisions treat such recoveries as outside the ambit of service tax.

Conclusion: The notice pay recoveries do not amount to consideration for a taxable service and the demand is not sustainable, in favour of the assessee.

Issue (ii): whether amounts recovered for non-achievement of sales targets by dealers or distributors constitute consideration for a declared service under the service tax law.

Analysis: Recoveries linked to failure to achieve contractual targets are penal or compensatory in character and are not payments made for the appellant's agreement to tolerate a default. For the declared service of tolerating an act to apply, there must be a specific contractual arrangement for such tolerance and a flow of consideration for that activity. The circular relied upon and the settled judicial view hold that such recoveries are not consideration for service.

Conclusion: The recoveries for non-achievement of sales targets are not taxable as declared service and the demand is not sustainable, in favour of the assessee.

Final Conclusion: The demand of service tax on both categories of recoveries could not be sustained, and the impugned order was set aside.

Ratio Decidendi: A recovery is taxable as a declared service under the toleration clause only if the agreement specifically provides for that activity and the payment is consideration for it; compensatory or penal recoveries arising from contractual breach do not constitute consideration for service.

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