Exemption for services to UN-linked organisations and pre-notice reversal of Cenvat credit defeated service tax demand and penalty.

Services rendered to international organisations connected with the United Nations were treated as covered by the applicable exemption notifications, so the service tax demand, with consequential interest and penalty on that count, was set aside. Where Cenvat credit attributable to exempted services had been reversed with interest before the show cause notice, the statutory bar under section 73(3) of the Finance Act, 1994 applied, making a notice unnecessary for that amount and rendering penalty unsustainable. The reversal with interest was sustained, but the related penal consequence was deleted.

---

---

Issues: (i) Whether the service tax demand could be sustained where the services were held to fall within the exemption available under Notification No. 16/2002-ST read with Notification No. 25/2012-ST. (ii) Whether penalty could be imposed when the Cenvat credit attributable to exempted services had been reversed with interest before issuance of the show cause notice.

Issue (i): Whether the service tax demand could be sustained where the services were held to fall within the exemption available under Notification No. 16/2002-ST read with Notification No. 25/2012-ST.

Analysis: The services were rendered to international organisations connected with the United Nations. A prior Tribunal decision on an identical question had held that services provided in such a context would be covered by the exemption notification, and that view was followed. The reasoning rejected the Revenue's objection based on the recipient's absence from the schedule to Section 3 of the United Nations (Privileges and Immunities) Act, 1947.

Conclusion: The demand of service tax, along with the consequential interest and penalty on that count, was set aside.

Issue (ii): Whether penalty could be imposed when the Cenvat credit attributable to exempted services had been reversed with interest before issuance of the show cause notice.

Analysis: The appellant had reversed the Cenvat credit relatable to exempted output services and had paid the corresponding interest before the notice was issued. In that situation, the statutory bar in Section 73(3) of the Finance Act, 1994 was attracted, and the notice itself was unnecessary for that component. The reversal was upheld, but penal consequence was held unwarranted.

Conclusion: The penalty relating to the reversed Cenvat credit was set aside while the reversal with interest was sustained.

Final Conclusion: The appeal succeeded to the extent of deleting the service tax demand and the penalties, while the credit reversal with interest was left undisturbed.

Ratio Decidendi: Where the applicable exemption covers the service on the facts found, the corresponding tax demand cannot survive; and where credit attributable to exempted services is reversed with interest before notice, penalty is not sustainable and a notice under Section 73(3) of the Finance Act, 1994 is unnecessary for that amount.

---