Forex Profit Not Taxable Under Service Tax: Madras High Court Overturns CESTAT Order in SBI Refund Dispute
Case Reference
State Bank of India Vs Deputy Commissioner (Madras High Court)
Background and Context
This matter came before the Madras High Court as a Civil Miscellaneous Appeal filed by a nationalised bank, challenging the order passed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, which had dismissed the bank's appeal. The case revolves around a service tax payment made under departmental instructions, a subsequently rejected refund claim, and a suo motu adjustment made by the assessee — all of which culminated in a significant ruling on the intersection of taxability, limitation, and unjust enrichment.
Facts of the Case
How the Dispute Originated
During a routine audit conducted by the Central Excise and Service Tax Department, the audit team advised the assessee — a nationalised bank — that its share of profit derived from foreign exchange transactions constituted a taxable service. Acting entirely on these departmental instructions, the bank remitted service tax amounting to ₹20,23,916/- on 22.12.2006.
Upon conducting its own internal verification at a later stage, the assessee concluded that such profit from foreign exchange transactions was not actually subject to service tax. On this basis, the bank filed a formal refund claim, asserting that the original remittance had been made erroneously and without any legal obligation.
Rejection of Refund Claim
The refund claim filed by the assessee was rejected by the department. The ground for rejection was not the merits of the taxability question, but rather limitation — i.e., the claim had been filed beyond the prescribed time period. The assessee did not prefer an appeal against this rejection order.
Suo Motu Adjustment and Departmental Objection
Separately, while filing a subsequent return, the assessee adjusted the earlier service tax amount on a suo motu basis. This action did not go uncontested — the department took objection to the adjustment and initiated proceedings. This resulted in the passing of an order-in-original, which confirmed the following demands:
"I confirm the demand of Service Tax of Rs.19,87,688/- (Service Tax Rs.19,48,713/- and Edn. cess Rs.38,975/-) (Rupees Nineteen Lakhs Eighty Seven Thousand Six Hundred and Eighty Eight Only) proposed in the show cause notice dated 27.02.2008, under Section 73(1) of the Finance Act, 1994. I demand appropriate interest under Section 75 of the Finance Act, 1994 and I impose a penalty of Rs.1,00,000/- (Rupees One Lakh Only) for non-payment of Service Tax under Section 76 of the Finance Act, 1994."