Refund rejection cannot sustain tax demand where payment was made under audit advice on a non-taxable transaction.

Tax paid on departmental audit advice for a transaction later found non-taxable could not be retained merely because a refund claim was rejected as time-barred or not separately challenged. The court treated the assessee's suo motu adjustment as a technical correction of an erroneous payment, not a mala fide act, and held that procedural rejection of refund did not validate the levy. Once the foundation of taxability failed, the consequential service tax demand, interest and penalty could not survive, and the impugned orders were annulled.

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Issues: Whether service tax, interest and penalty could be sustained when the amount was paid on departmental audit advice on a transaction later found not taxable, and whether the assessee's suo motu adjustment was impermissible because the refund claim had been rejected as time-barred and not separately challenged.

Analysis: The payment was made only on the instructions of the audit team, and the underlying transaction was found not liable to service tax. In that situation, the department could not retain the amount merely because the refund application was rejected on limitation or because the assessee did not appeal that rejection. The adjustment made by the assessee was treated as a technical correction of an erroneous payment and not as a mala fide or unlawful act. The consequential demand, interest and penalty could not survive once the foundation of taxability failed.

Conclusion: The service tax demand, interest and penalty were set aside, and the assessee succeeded.

Final Conclusion: The impugned orders were annulled and the appeal was allowed in full, resulting in relief to the assessee.

Ratio Decidendi: Where tax has been paid under departmental insistence on a transaction later found non-taxable, procedural rejection of a refund claim does not validate retention of the amount or sustain consequential demand and penalty.

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