The Supreme Court has ruled that referral charges collected by automobile dealers from financial institutions and insurance providers qualify as taxable Business Auxiliary Service (BAS) under Section 65(105)(zzb) of Chapter V of the Finance Act, 1994. A bench comprising Justice J. B. Pardiwala and Justice K. Vinod Chandran addressed the dual questions of service tax applicability and suppression of turnover for invoking the extended period of limitation. While upholding the levy of service tax on such referral fees, the apex court partly allowed the appeal filed by M/s TVS Motor Company Limited and set aside the penalty under Section 78 of the Finance Act, as the company had discharged its full tax liability prior to the issuance of the show cause notice.
Background of the Case
The matter concerned the assessment period spanning financial years 2003–2004 to 2006–2007. M/s TVS Motor Company Limited, a dealer in automobiles, received referral charges from HDFC Bank, ICICI Bank, and the Oriental Insurance Company. These charges were paid to the dealer when vehicle buyers availed motor vehicle loans or purchased insurance policies through the facilitation of the dealer.
The dealer had recorded these referral fees under ‘miscellaneous income’ and had not disclosed them as Business Auxiliary Service in its service tax returns. On April 2, 2008, the Department of Central Excise issued a show cause notice invoking the extended period of limitation on grounds of turnover suppression. Prior to the issuance of this notice, TVS Motor deposited the entire tax liability in four installments: ₹1,81,560 on March 31, 2005; ₹1,02,07,017 on November 4, 2006; ₹19,27,172 on February 21, 2007; and ₹23,86,085 on March 30, 2007.
Arguments of the Parties
Appearing for the appellant, Ms. Charanya Lakshmikumaran argued that because the entire tax liability was paid prior to the show cause notice, Section 73(3) of the Finance Act, 1994 absolves the assessee from penalty. She pointed out that there was widespread confusion across various Tribunals regarding the classification of such services, which was only resolved later by a Larger Bench in M/s. Pagaria Auto Center v. Commissioner of Central Excise, Aurangabad.
Representing the Department, Senior Counsel Ms. Nisha Bagchi contended that the assessee deliberately classified the referral income as ‘miscellaneous income’, amounting to an act of suppression. She submitted that the provisions of the Finance Act, 1994 were well known to the dealer, and taking commission as referral charges for directing clients to lending institutions and insurance firms could not escape service tax liability, justifying the penalty.
Court’s Analysis
Examining the contractual agreements between the dealer, the banks, and the insurance provider, the Supreme Court held that the referral charges received when customers take out policies or avail vehicle loans “…definitely is a Business Auxiliary Service.” The bench noted that the assessee “…is promoting the business of the banks and the insurance company for which they receive an amount as stipulated in the agreement.”
The court highlighted the findings of the Larger Bench of the Tribunal in M/s. Pagaria Auto Center v. Commissioner of Central Excise, Aurangabad, which analyzed TVS Motor’s operational arrangement:
“…revealed close association of the assessee with banks/financial institutions for promotion and marketing of banking and financial services; that a nexus of the service provided by the assessees as input for providing the output of banking and financial services is also revealed; that under the agreements, the assessee was required to inform its dealers and authorized service centres about the arrangement with the financial institutions and the buyers of vehicles must also be informed about availability of financial facilities. The dealers and authorized service centres of the assessee were also required to sensitise customers about the lending facilities offered by financial institutions. On a conspectus of the revealed factual situation, the Tribunal concluded that the assessee was promoting and marketing the services of banks and insurance companies, was a link in the economic activity carried on by them and was therefore providing the taxable BAS.”
Regarding the imposition of penalty, the bench analyzed Section 73(3) of the Finance Act, observing that it mandates “…if there is short levy or a short payment of tax, then if prior to notice issued, the tax liability is satisfied, the department would desist from issuing a show cause notice.”
Acknowledging that genuine confusion existed regarding tax liability during 2003–2004 to 2006–2007, the court held that since the complete tax liability was satisfied before the show cause notice dated April 2, 2008 was issued, the penalty under Section 78 must be set aside. The court noted that the penalty under Section 76 had already been set aside by the Tribunal.
Decision
The Supreme Court partly allowed the appeal, maintaining the taxability of referral charges as Business Auxiliary Service, while setting aside the penalty imposed under Section 78 of the Finance Act, 1994.
Case Title: M/S TVS Motor Company Limited v. Commissioner of Central Excise, Chennai-III
Case No.: Civil Appeal No. 7947 of 2013
Bench: Justice J. B. Pardiwala and Justice K. Vinod Chandran
Date: August 19, 2026
