Contractual penalties are not taxable consideration for tolerating breach absent an independent agreement, so the demand failed.

Amounts recovered as bundling error charges, rejection charges, non-compliance charges and similar contractual deductions were held not to constitute consideration for a declared service under Section 66E(e) of the Finance Act, 1994. A declared service for tolerating an act or situation requires an independent agreement in which one party accepts, for consideration, to refrain from an act, tolerate a breach, or do an act. Contractual penalties, liquidated damages and other deductions arising from default or non-performance are compensatory or deterrent in nature and do not, by themselves, establish taxable consideration. The demand was therefore unsustainable and the impugned order was set aside.

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Issues: (i) Whether amounts recovered as bundling error charges, rejection charges, non-compliance charges and similar deductions constituted consideration for a declared service under Section 66E(e) of the Finance Act, 1994.

Analysis: A declared service under Section 66E(e) requires a specific agreement where one party, for consideration, agrees to refrain from an act, tolerate an act or situation, or do an act. The statutory definition of service under Section 65B(44) also requires an activity carried out for consideration. Amounts recovered as penalties, liquidated damages or other contractual deductions arising from breach or non-performance do not, by themselves, amount to consideration for tolerating a default. Such recoveries are compensatory or deterrent in nature and are not referable to an independent agreement to tolerate the breach.

Conclusion: The impugned recoveries were not taxable as consideration for a declared service under Section 66E(e), and the demand could not be sustained.

Final Conclusion: The demand was unsustainable and the appeal succeeded, with the impugned order set aside.

Ratio Decidendi: Recovery of contractual penalties or liquidated damages is not consideration for a declared service under Section 66E(e) unless there is an independent agreement to tolerate the act or situation for consideration.

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