Airline cancellation charges compensating contractual breach are not consideration for a declared service under Section 66E(e).

The appellant, an airline, collected cancellation, refund and “no-show” charges from passengers and paid service tax on those amounts after claiming the applicable abatement for air-transport services.

The Department treated the charges as consideration for a separate declared service under Section 66E(e) of the Finance Act, 1994, and alleged that tax was payable on their full value. A show-cause notice proposed a demand of ₹6,07,62,939; the adjudicating authority confirmed ₹5,07,87,202, dropped the balance, and imposed penalties. The appellant appealed against the adjudication orders.

1. Whether cancellation, refund and no-show charges collected from passengers constituted consideration for a separate declared service of “tolerating an act” under Section 66E(e) of the Finance Act, 1994.

2. If the charges were taxable as a separate service, whether the air-transport abatement applied to them.

Section 66E(e) of the Finance Act, 1994 covers an agreement to tolerate an act or situation, but does not make compensation for breach of an agreement taxable where the agreement’s purpose is performance, not toleration of the breach.

Applying the principles stated in South Eastern Coalfields Ltd. v. Commissioner of C. Ex. & S.T., Raipur, 2021 (55) G.S.T.L. 549 (Tri.—Del.), and followed in Dy. G.M. (Finance), Bharat Heavy Electricals Ltd. v. Commissioner of Customs & Central Excise, Bhopal, (2023) 4 Centax 400 (Tri.—Del.), liquidated damages or compensation for contractual default are not, without more, consideration for a separate service of tolerating that default.

The parties’ agreement was for the airline to carry the passenger and for the passenger to pay the fare. The cancellation charges operated as compensation when a passenger failed to travel; they were not charged under a separate agreement whose purpose was for the airline to tolerate cancellation or non-attendance.

Since the charges were not taxable as a separate service, the dispute over whether the air-transport abatement applied to them became immaterial.

It set aside the impugned orders and allowed both appeals with consequential relief; the abatement question therefore did not require determination.