Liquidated damages for contract delay are not consideration for tolerating breach and fall outside declared service tax

Amounts received as penalty or liquidated damages for delay or contractual non-compliance do not constitute consideration for tolerating an act under the declared service provision. The reasoning follows earlier co-ordinate Bench decisions, including the appellant's own case, which held that such receipts are not paid for any service of tolerating breach or delay. Accordingly, they fall outside section 66E(e) of the Finance Act, 1994, and the service tax demand is unsustainable.

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Issues: Whether amounts received as penalty or liquidated damages for delay in performance under a contract constitute consideration for a declared service so as to attract service tax under section 66E(e) of the Finance Act, 1994.

Analysis: The question was treated as settled by earlier co-ordinate Bench decisions, including the appellant's own earlier case, which held that liquidated damages or penalty for contractual non-compliance do not amount to consideration for tolerating an act. Such receipts are not shown to arise from any obligation to tolerate delay or breach as a service, and therefore do not fall within the scope of the declared service provision.

Conclusion: The amount received as liquidated damages or penalty is not taxable as consideration for a declared service under section 66E(e) of the Finance Act, 1994, and the demand is unsustainable.

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