Synopsis

The appellant, State Bank of India (Commercial Branch, Coimbatore), paid service tax of Rs. 20,23,916/- based on the instructions of an audit team of the Central Excise and Service Tax Department, which advised that the share of profit in foreign exchange transactions was a taxable service. Subsequently, the bank realised that such profit share was not liable to service tax and filed a refund claim. The refund claim was rejected on the ground of limitation. The bank then suo motu adjusted the amount in its subsequent service tax return. The department treated this as an irregular adjustment, confirmed a demand of Rs. 19,87,688/- with interest and imposed a penalty of Rs. 1,00,000/-. The Commissioner (Appeals) and the CESTAT upheld the demand. The Madras High Court allowed the appeal, holding that since the amount was paid solely on the instructions of the audit team and the profit share was not taxable, the department ought to have refunded the amount. The court further held that the bank’s suo motu adjustment was not improper or impermissible. The orders of the lower authorities were set aside.

Court: High Court of Judicature at Madras

Coram: Dr. Justice G. Jayachandran and Justice Shamim Ahmed

Date of Judgment: 8th April 2026

Citation: 2026:MHC:1421

Core Law: Finance Act, 1994; Central Excise Act, 1944; Service Tax

2. Legal Framework

Major laws and provisions involved

• Finance Act, 1994 – Sections 75 (interest on delayed payment of service tax), 76 (penalty for failure to pay service tax), 83 (applicability of provisions of Central Excise Act)

• Central Excise Act, 1944 – Section 11B (claim for refund of duty), Section 35G (appeal to High Court from CESTAT)

• Service Tax Rules, 1994 – Rule 6(3) (credit of service tax paid)

Key legal principles applied

• Payment made under mistake of law: If tax is paid based on incorrect advice or instruction of the department’s audit team, and it is subsequently found that the transaction is not taxable, the assessee is entitled to refund. The department cannot retain money paid under mistake.

• Suo motu adjustment by assessee: When a refund claim is rejected on technical grounds (e.g., limitation), the assessee may adjust the excess payment in subsequent returns, provided the underlying liability is not legally sustainable. Such adjustment is not impermissible if the amount was never legally due.

... Upgrade to a Premium Plan to view the full judgment.