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of Levy of service tax on cheque dishonour charges and late delivery charges was challenged. It was held that the recovery of liquidated damages or penalty from another party cannot be considered as consideration for any service, as neither the appellant is carrying out any activity to receive compensation, nor can there be an intention of the other party to breach or violate the contract and suffer a loss. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated, and cannot be said to be towards toleration of the defaulting party. The expectation is that the other party complies with the terms of the contract, and a penalty is imposed only if there is non-compliance. The Appellate Tribunal has consistently held that penalty or late delivery charges cannot be subjected to Service Tax u/s 66E of the Finance Act 1994. Consequently, the impugned order was set aside, and the appeal was allowed.
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