Liquidated damages for contractual delay are not consideration for tolerance and do not attract service tax under declared service provisions.

Liquidated damages recovered under contractual delay clauses were treated as consideration for an alleged act of tolerance under section 66E(e) of the Finance Act, 1994. The document notes that such amounts arose only when supply or performance was delayed beyond the agreed timeline and were deducted as a percentage of contract value. Applying coordinate bench decisions, it states that liquidated damages are not receipts for any service and do not amount to taxable declared service. The demand and penalty based on that classification were therefore set aside.

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Issues: Whether liquidity damages recovered under contractual delay clauses are liable to service tax as a declared service under section 66E(e) of the Finance Act, 1994.

Analysis: The demand was raised by treating amounts collected as liquidity damages from suppliers or service providers as consideration for an act of tolerance under the declared service provision. The amounts were recovered only when there was delay in supply or performance beyond the contractual timeline, by deduction of a specified percentage of the contract value. The issue was held to be covered by coordinate bench decisions which had already concluded that liquidated damages are not receipts towards any service and therefore do not attract service tax as a declared service.

Conclusion: Liquidity damages are not liable to service tax under section 66E(e) of the Finance Act, 1994.

Final Conclusion: The demand and penalty based on treatment of liquidity damages as a taxable declared service were set aside, and the appeal succeeded.

Ratio Decidendi: Amounts recovered as liquidated damages for contractual delay do not constitute consideration for a taxable service or an act of tolerance under the declared service provision.

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