GST UPDATE

Hon’ble Court: HIGH COURT OF MADRAS
Case Title: STATE BANK OF INDIA vs DEPUTY COMMISSIONER SERVICE TAX CEL
Petition / Appeal No. & Citation : CMA No. 1925 of 2019

Hon’ble Judge(s)	G Jayachandran & Shamim Ahmed, JJ
Date of Order	April 08, 2026
Outcome	Appeal allowed in favour of appellant

Brief Facts of the Case

The appellant, a nationalised bank, was subjected to an audit by the Service Tax Department. During the audit, the department instructed the appellant to pay service tax amounting to approximately ?20 lakh on the assumption that profit earned from foreign exchange transactions constituted taxable service. Acting upon such instructions, the appellant deposited the tax. However, upon subsequent legal examination, it was realized that such income was not liable to service tax, and therefore, the amount had been paid erroneously. Accordingly, the appellant filed a refund claim. The refund claim was rejected on the ground of limitation under Section 11B, following which the appellant suo motu adjusted the amount in subsequent returns. This adjustment was disallowed by the department, resulting in confirmation of demand, along with interest and penalty. The same was upheld by the Commissioner (Appeals) as well as the CESTAT. Aggrieved, the appellant filed the present appeal before the High Court.

Relevant Section / Rule

Section 11B Central Excise Act, 1944,
Rule 6(3) of STR, 1994

Question before Hon’ble Court / Authority

Whether tax paid under a mistake of law (on audit instruction) is barred by limitation?
Whether denial of refund leads to unjust enrichment of the department?
Whether procedural lapses of non-filing of appeal against refund rejection override substantive rights?

Brief Arguments by Appellant

The payment of service tax was made solely on the basis of directions issued by the departmental audit team, and not on account of any independent determination of tax liability.
The amount so paid was not legally leviable, as the profit arising from foreign exchange transactions does not fall within the ambit of taxable service, which position also stands supported by a decision of another bench in the appellant’s own case.
The rejection of the refund claim on the ground of limitation is unjustified, since the payment itself was made under a mistake of law, and therefore, retention of such amount by the department would amount to unjust enrichment.
The suo motu adjustment of the excess tax in subsequent returns was a legitimate course of action, especially in circumstances where the department had wrongly denied the refund. The failure to challenge the refund rejection order cannot defeat the appellant’s substantive right, as procedural lapses should not override the legality of the claim, particularly when the tax itself was not payable.

Brief Arguments by Respondent

The refund claim filed by the appellant was barred by limitation under Section 11B, and therefore, was rightly rejected in accordance with law.
The appellant failed to challenge the order rejecting the refund claim, and consequently, the issue attained finality, making any subsequent claim untenable.
The act of taking suo motu credit is not permissible under the statutory framework, as there is no provision allowing unilateral adjustment of tax liability in such cases.
The reliance on Rule 6(3) of the Service Tax Rules is misplaced, since the said provision does not apply to disputes concerning taxability, but only to cases involving non-provision of services.

Findings and Judgement

The Hon’ble High Court made the following key findings:

Tax Paid Under Mistake and Audit Direction

The Court found that the appellant had deposited the service tax solely on the insistence of the departmental audit team, and not out of any independent determination of liability. Such payment, made under a mistaken understanding of law, does not amount to a voluntary acceptance of tax liability and therefore cannot be treated as binding upon the assessee.

Unjust Enrichment of the Department Not Permissible

It was acknowledged that the income arising from foreign exchange transactions was not liable to service tax. Once the very levy is held to be unsustainable, the amount collected loses its character as “tax,” thereby creating a corresponding obligation on the department to return the same to the assessee. The Court strongly held that retention of an amount which is not legally due would result in unjust enrichment of the department, which cannot be permitted in law.

Procedural Lapses vs Substantive Right

The Court emphasized that procedural lapses, such as non-filing of appeal against refund rejection, cannot defeat substantive rights, especially where the tax itself was not payable. The approach of the authorities in rejecting the claim purely on technicalities was held to be unsustainable.

Absence of Mala Fide Intent

It was further observed that the entire issue arose out of a technical error without any mala fide intention on the part of the appellant. Accordingly, the imposition of penalty and interest was not justified in the facts of the case.
Accordingly, the High Court allowed the appeal and set aside the orders of the adjudicating authority and the Tribunal, holding that the service tax collected was not legally payable. It ruled that the department cannot retain such amount on technical grounds, as it would amount to unjust enrichment. Consequently, the demand of tax, along with interest and penalty, was quashed.

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GST update /2026-27/0009

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Brief Facts of the Case

Relevant Section / Rule

Question before Hon’ble Court / Authority

Brief Arguments by Appellant

Brief Arguments by Respondent

Findings and Judgement

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