Liquidated damages for contractual delay are not consideration for an act of tolerance and are not taxable as a declared service.

Amounts recovered as liquidated damages for a supplier's delay were held not to constitute consideration for an act of tolerance under section 66E(e) of the Finance Act, 1994. The demand was based on the premise that the recovery was a declared service, but the Tribunal applied coordinate Bench decisions and found that such damages arise only from contractual non-performance, not from any taxable service. On that basis, the impugned service tax demand was not legally sustainable and the recovery was not exigible to service tax.

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Issues: Whether amounts recovered as liquidity damages from suppliers for delay in performance are liable to service tax as a declared service under section 66E(e) of the Finance Act, 1994.

Analysis: The demand was founded on the premise that the amounts recovered as liquidity damages represented consideration for an act of tolerance. The recovery, however, arose only when the supplier or service provider failed to deliver goods or perform services within the contractual time limit, and the Tribunal found that the issue had already been settled by coordinate Benches holding that such damages are not receipts towards any service. On the facts, the Tribunal held that the ratio of those decisions squarely applied and that the impugned demand was not legally tenable.

Conclusion: The amounts collected as liquidity damages were not liable to service tax under section 66E(e), and the demand failed in favour of the assessee.

Ratio Decidendi: Amounts recovered as liquidated damages for contractual delay do not constitute consideration for a declared service or an act of tolerance and therefore are not exigible to service tax.

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