Suo motu adjustment of tax paid on non-taxable transactions is permissible to prevent departmental unjust enrichment.

The Appellant, a nationalized bank, was instructed by a Central Excise and Service Tax audit team to pay service tax amounting to ₹20,23,916/- on the share of profit from foreign exchange transactions

The Appellant paid the amount on 22.12.2006 but subsequently realized such profits were not taxable

A refund claim was filed and rejected by the Department on the grounds of limitation

Consequently, the Appellant suo motu adjusted the amount in a subsequent return, leading the Adjudicating Authority to issue an 'order in original' confirming a demand of ₹19,87,688/-, plus interest and a penalty of ₹1,00,000/-

The Commissioner (Appeals) and the CESTAT dismissed the Appellant’s challenges, with the Tribunal holding that suo motu credit was impermissible under Rule 6(3) of the Service Tax Rules (STR), 1994, and that the rejection of the initial refund claim had attained finality as it was not appealed

1. Whether the share of profit earned by a bank branch in foreign exchange transactions is a taxable service under the Finance Act, 1994

2. Whether the Department can retain service tax paid in error or impose penalties when an assessee suo motu adjusts such payments after a refund claim is rejected on technical grounds

Section 35G of the Central Excise Act, 1944, read with Section 83 of the Finance Act, 1994, which provides the framework for appeals to the High Court

Rule 6(3) of the Service Tax Rules, 1994, which the Tribunal had used to deny suo motu credit for taxability disputes

Equitable principle against the "unjust enrichment" of the government, asserting that the State cannot retain taxes collected without the authority of law, notwithstanding procedural lapses such as limitation periods under Section 11B of the Central Excise Act or the failure to appeal a refund rejection

The Court observed that the Appellant made the initial payment solely based on the erroneous instructions of the Department's audit team

It noted that subsequent legal positions established that profit shares from foreign exchange are not taxable

The Court reasoned that since the tax was not legally due, the Department had an inherent obligation to refund the amount at the first instance

The Court rejected the Tribunal's focus on the finality of the refund rejection, holding that the Department cannot seek the "seal of approval" for unjust enrichment based on technicalities like limitation or failure to appeal

The assessee's suo motu adjustment was characterized as a "technical error or mistake" devoid of mala fide intention, which did not warrant the imposition of penalties

The High Court allowed the appeal and set aside the Final Order No. 43138 of 2017 passed by the CESTAT and the underlying 'order in original'. No costs were awarded