Export of service through debit note adjustment and prior tax payment defeated service tax demand and penalty.

Corporate guarantee charges were treated as consideration for an export of service where the amount was received through debit note-based adjustment and reflected in the records as receipt in convertible foreign exchange; on that basis, the service tax demand could not be sustained. Penalty was also held not to be imposable because the entire service tax had already been paid before the show-cause notice was issued. The impugned order was set aside and consequential relief followed.

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Issues: (i) Whether the consideration for corporate guarantee service satisfied the requirement of receipt in convertible foreign exchange so as to treat the service as export and disallow the service tax demand. (ii) Whether penalty was sustainable where the service tax had been paid before issuance of the show-cause notice.

Issue (i): Whether the consideration for corporate guarantee service satisfied the requirement of receipt in convertible foreign exchange so as to treat the service as export and disallow the service tax demand.

Analysis: The appellant had raised debit notes and the amount corresponding to the service charges was shown through adjustment and reflected in its records. On that basis, the receipt condition was treated as satisfied for export of service. Once the requisite consideration was held to have been received, the premise for fastening service tax on the transaction did not survive.

Conclusion: The service was treated as export and the demand of service tax was held to be unsustainable, in favour of the assessee.

Issue (ii): Whether penalty was sustainable where the service tax had been paid before issuance of the show-cause notice.

Analysis: The record showed that the entire service tax had already been paid before the show-cause notice was issued. In that situation, the basis for imposing penalty did not remain available.

Conclusion: No penalty was held to be imposable, in favour of the assessee.

Final Conclusion: The impugned order was set aside and the appeal succeeded with consequential relief.

Ratio Decidendi: Where the consideration for an export service is received through debit note-based adjustment recognised as receipt in convertible foreign exchange, service tax cannot be sustained on the transaction, and prior payment of tax before notice negates penalty.

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