TaxTMI 
TaxTMI 
2026 (6) TMI 799
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....course of its operations, the Respondent, in its capacity as buyer/procurer, entered into contracts and agreements with various suppliers and vendors for the supply of goods and services. 3. Under the terms of the said contracts, the Respondent was entitled to recover 'penalties and/or liquidated damages' from suppliers and vendors in the event of delayed delivery of contracted goods or services. During the period from 1.7.2012 to 31.3.2017, the Respondent recovered a total sum of Rs. 4,71,10,557/- on account of such 'penalties/liquidated damages'. 4. The Department took the view that such recoveries constituted "consideration" for a taxable service rendered by the Respondent to its suppliers and vendors, falling within the ambit of a "declared service" under Section 66E(e) of the Finance Act, 1994 specifically, the service of "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act." Accordingly, a Show Cause Notice dated 06.04.2018 was issued to the Respondent, demanding service tax of Rs. 63,21,634/- on the aforesaid recoveries, along with applicable interest and penalty. 5. The said Show Cause Notice cu....
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....e rendered, such a recovery is fundamentally compensatory and remedial in nature. It represents an agreed measure of damages, a consequence of breach and does not flow from any consensual service transaction. 10. For a transaction to attract service tax as a "declared service" under Section 66E(e), there must exist, at the very minimum, a bilateral and consensual arrangement whereby one party agrees, for consideration, to refrain from an act, tolerate a situation, or do something at the behest of the other. The element of agreement and mutual consensus to the "tolerating" of an act, in exchange for a defined consideration, is a sine qua non. In the present facts, no such independent agreement to tolerate delay existed. The liquidated damages clause is not a service agreement, it is a protective contractual provision that imposes a financial consequence upon the defaulting vendor. The act of recovering damages post-breach cannot be equated with an agreement to tolerate the breach itself. 11. The question is no longer res integra. It stands conclusively settled by the Principal Bench of this Tribunal in South Eastern Coalfields Ltd. v. Commissioner of Central Excise....
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.... Service Tax v. M/s. Bhayana Builders [2018 (2) TMI 1325 = 2018 (10) G.S.T.L. 118 (S.C.)], while deciding the appeal filed by the Department against the aforesaid decision of the Tribunal, also explained the scope of Section 67 of the Act. The Supreme Court observed that any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable under Section 67. ... ... xxx xxx xxx 24. What follows from the aforesaid decisions of the Supreme Court in Bhayana Builders and Intercontinental Consultants, and the decision of the Larger Bench of the Tribunal in Bhayana Builders is that "consideration" must flow from the service recipient to the service provider and should accrue to the benefit of the service provider and that the amount charged has necessarily to be a consideration for the taxable service provided under the Finance Act. Any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which ....
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....mercial interest of the appellant and it cannot, by any stretch of imagination, be said that recovering any sum by invoking the penalty clauses is the reason behind the execution of the contract for an agreed consideration. It is not the intention of the appellant to impose any penalty upon the other party nor is it the intention of the other party to get penalized. 28. It also needs to be noted that Section 65B(44) defines "service" to mean any activity carried out by a person for another for consideration. Explanation (a) to Section 67 provides that "consideration" includes any amount that is payable for the taxable services provided or to be provided. The recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se, since neither the appellant is carrying on any activity to receive compensation nor can there be any 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 the same cannot be said to be towards toleration of the defaulting party. The expectation of the appellant is that th....
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....d granted lease hold rights for ninety years to Dr. M.M. Joshi in respect of a property. ... ... xxx xxx xxx 41. The Supreme Court also noticed that Section 74 of the Contract Act merely dispenses with the proof of "actual loss or damages". It does not justify the award of compensation, when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good the loss or damage which actually arose or which the parties knew when they made the contract 'to be likely to result from the breach'. The Supreme Court also found that there was no evidence that any loss was suffered by the plaintiff in consequences of the default by the defendant, save as to the loss suffered by being kept out of possession of the property. The Supreme Court, therefore, held that plaintiff would be entitled to retain only an amount of Rs. 1000/- that was received as earnest, out of amount of Rs. 25,000/-. 42. The conclusion drawn by the Learned Authorized Representatives of the Department from the aforesaid decision of the Supreme....