Contractual damages for delay are compensatory, not consideration for tolerating an act, and fall outside service tax.

Penalties and liquidated damages recovered for delayed delivery were held not to be consideration for a declared service under Section 66E(e) of the Finance Act, 1994. The text states that liability arises only where there is a bilateral arrangement with consideration for refraining from an act, tolerating an act or situation, or doing an act. Contractual damages collected on breach are compensatory, not a consensual service transaction, and binding precedent treated such recoveries as outside service tax. Accordingly, these recoveries are not liable to service tax.

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Issues: Whether penalties and liquidated damages recovered from suppliers and vendors for delayed delivery of goods or services constitute consideration for a declared service under Section 66E(e) of the Finance Act, 1994, so as to attract service tax.

Analysis: The recoveries arose from contractual clauses intended to compensate the innocent party for breach or default and were not consideration flowing from a consensual agreement to tolerate delay. Liability under Section 66E(e) requires a bilateral arrangement with consideration for refraining from an act, tolerating an act or situation, or doing an act. The contractual penalty mechanism is distinct from a service transaction and does not become taxable merely because damages are collected after breach. The issue was governed by binding precedent holding that liquidated damages, forfeiture of earnest money, and penalty amounts are not consideration for tolerating an act.

Conclusion: Such recoveries do not constitute consideration for a declared service under Section 66E(e) and are not liable to service tax.

Ratio Decidendi: Consideration for a declared service under Section 66E(e) must arise from a consensual agreement to refrain from an act, tolerate an act or situation, or do an act, and contractual damages or penalties recovered on breach are compensatory rather than consideration for service.

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