CESTAT Grants Major Relief to Indian Bank, Quashes Multi-Crore Service Tax Demands on Limitation Grounds

June 18, 2026 : In a significant ruling for the banking sector, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, has set aside service tax demands raised against Indian Bank, holding that the Revenue authorities wrongly invoked the extended period of limitation. The Tribunal found no evidence that the bank had suppressed facts or acted with an intention to evade tax, resulting in the complete collapse of the tax demands raised through multiple show cause notices.

The decision was delivered by a division bench comprising Judicial Member P. Dinesha and Technical Member Vasa Seshagiri Rao on June 18, 2026. The appeals arose from a common Order-in-Original passed by the Commissioner of GST and Central Excise, Chennai, concerning alleged short payment of service tax, non-payment of service tax, and irregular availment of CENVAT credit during various periods between 2005-06 and 2010-11.

The dispute involved several issues, including alleged non-payment of service tax on foreign exchange income earned through inter-bank transactions, short payment of service tax on turnover commission received from the Reserve Bank of India (RBI), service tax liability on arrangement fees, alleged excess or wrongful availment of CENVAT credit, and proportionate reversal of input tax credit under Rule 6(3A) of the CENVAT Credit Rules. The Revenue had raised demands amounting to several hundred crores of rupees along with interest and penalties.

Indian Bank argued that it is a public sector bank functioning under constant supervision of the Government of India and the Reserve Bank of India. The bank maintained that all transactions were duly recorded in its statutory books of accounts and were regularly examined during departmental audits. According to the bank, the dispute arose purely from differing interpretations of tax laws and not from any concealment of facts. Therefore, the extended limitation period under Section 73(1) of the Finance Act, 1994 could not legally be invoked.

On the issue of turnover commission, the bank contended that the commission was received from RBI for carrying out government business as its agent. It further argued that Notification No. 22/2006-ST dated March 31, 2006 exempted such services from service tax because the exemption available to the principal, namely RBI, also extended to its agents. The bank relied upon the Supreme Court’s decision in Commissioner of Service Tax, Bangalore v. Canara Bank in support of its position.

Regarding arrangement charges, Indian Bank submitted that the amounts collected were essentially in the nature of interest intended to compensate for the negative spread on export credit. Since interest on loans is specifically excluded from the taxable value of services under the valuation provisions, the bank argued that no service tax could be levied on such receipts.

The bank also challenged the denial of CENVAT credit on handling charges paid to State Bank of India, which acted as the lead lender in consortium lending arrangements. It maintained that service tax had been paid on the output services and therefore the related input tax credit was legally admissible. Similarly, with respect to BSNL invoices, the bank argued that the entire invoice value, including service tax, had initially been paid before any subsequent refund by BSNL, making the credit validly available at the time of availing it.

After examining the record, the Tribunal agreed with the bank’s principal argument on limitation. The bench observed that all transactions were properly reflected in the bank’s books and there was no allegation of fraud, misrepresentation, or deliberate concealment. The Tribunal noted that some of the issues involved interpretation of tax provisions and that a mere difference of opinion between the assessee and the department could not justify invoking the extended limitation period.

The Tribunal observed that, “there cannot be any scope to allege suppression of facts with an intent to evade tax” when transactions are fully disclosed in statutory records and the dispute revolves around interpretation of law. It further held that “Revenue is not justified in invoking the extended period of limitation.”

Relying on several Supreme Court precedents, including Cosmic Dye Chemical v. CCE, Padmini Products v. CCE, and Chemphar Drugs & Liniments v. CCE, the Tribunal reiterated that suppression of facts must be deliberate and accompanied by an intention to evade tax before the extended limitation period can be applied. Mere omission or a legal disagreement does not satisfy this requirement.

Having concluded that the entire demand was founded on an unsustainable invocation of the extended limitation period, the Tribunal set aside the impugned order in its entirety. Since the demands themselves failed on limitation, the bench declined to examine the remaining substantive issues relating to service tax liability and CENVAT credit. Consequently, all appeals filed by Indian Bank were allowed, while the department’s appeals were dismissed. The bank was also held entitled to consequential relief in accordance with law.

The ruling is expected to have wider implications for banks, financial institutions, and public sector undertakings facing indirect tax disputes based on extended limitation periods. The judgment reinforces the principle that where transactions are transparently disclosed and the dispute concerns interpretation of law, tax authorities cannot invoke extended limitation merely because they disagree with the taxpayer’s legal position.

Case: Indian Bank v. Commissioner of GST & Central Excise, Chennai & Connected Appeals