Liquidated damages for short delivery are not consideration for a declared service under Section 66E(e.

Star Cement recovered amounts from transporters for cement that was short-delivered or delivered in damaged condition, pursuant to its agreements with the transporters.

The Department treated the recoveries as consideration for a “Declared Service” under Section 66E(e) of the Finance Act, 1994.

The original authority confirmed service tax of ₹1,08,29,117 for FY 2015–16, with interest, and imposed penalties under Sections 78(1), 77(1)(a) and 77(2).

The Commissioner (Appeals) upheld the order.

Star Cement appealed to the Tribunal, contending that the recoveries were liquidated damages or compensation, not consideration for a service.

1. Whether amounts recovered by Star Cement from transporters for short delivery or damage to cement constituted consideration for a “Declared Service” under Section 66E(e) of the Finance Act, 1994, and were liable to service tax.

2. Whether the service-tax demand, interest and penalties could be sustained where the recoveries were found to be compensation or liquidated damages rather than consideration for a service.

Section 66E(e) of the Finance Act, 1994 treats agreeing to an obligation to refrain from an act, tolerate an act or situation, or do an act as a declared service.

Section 66D(p) places specified transportation of goods by road outside the taxable service regime, subject to the stated exceptions for goods transportation agencies and courier agencies.

The Tribunal also considered Section 68(2) read with Rule 2(d)(i)(B) of the Service Tax Rules, 1994, and Section 74 of the Indian Contract Act, 1872, in addressing the freight and contractual compensation.

Relying on authorities including “Airport Authority of India”, “Amit Metaliks Ltd.”, “South Eastern Coalfields Ltd.” and “SAIL”, the Tribunal applied the principle that contractual penalties or liquidated damages for breach are not, without more, consideration for a service or for tolerating an act.

Under Sections 77 and 78 of the Finance Act, 1994, the Tribunal separately considered the penalties imposed for the alleged statutory violations.

The Tribunal found that the recoveries compensated Star Cement for losses caused by transporters’ failure to deliver the invoiced quantity of cement in good condition; they were not amounts paid in return for Star Cement tolerating an act or providing a service.

It further noted that the recoveries related to the transportation arrangement, for which service tax had been paid on the freight, and treated the amounts as liquidated damages rather than consideration taxable under Section 66E(e).

Applying the cited decisions on contractual compensation, the Tribunal held that the recoveries could not be taxed as a declared service.

Since the demand was unsustainable, the basis for the Section 78 penalty also failed; however, the Tribunal upheld the penalties under Sections 77(1)(a) and 77(2) for the stated statutory violations.

It set aside the penalty under Section 78 but upheld the penalties under Sections 77(1)(a) and 77(2).

The appeal was disposed of on those terms.