The Supreme Court on Wednesday (August 19) held that the referral charges received by automobile dealers from banks and insurance companies for facilitating vehicle loans and insurance policies are taxable as “Business Auxiliary Service” under the Finance Act, 1994.

“The assessee is promoting the business of the banks and the insurance company for which they receive an amount as stipulated in the agreement.”, observed a bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran.

TVS Motor Company Ltd., a dealer in automobiles, received 'referral charges' from banks (HDFC Bank & ICICI Bank) and insurance companies (Oriental Insurance Company) for referring customers who availed motor vehicle loans and took out insurance policies through the dealer's facilitation.

The Department sought to tax these referral charges as "Business Auxiliary Service" under Section 65(105)(zzb) of the Finance Act, 1994. The assessee contended that the charges were not taxable and that there was confusion regarding the taxability of such services.

The assessee deposited the entire tax liability prior to the issuance of the show cause notice, however disputed the show cause notice issued on April 2, 2008, after the entire tax liability had already been discharged.

The judgment authored by Justice Chandran affirmed the Tribunal's finding that the referral charges are taxable as Business Auxiliary Service. The Court endorsed the Central, Excise and Services Tax Appellate Tribunal (“CESTAT”) decision in M/s. Pagaria Auto Center v. Commissioner of Central Excise, Aurangabad (2014), which held that referral charges received by automobile dealers for facilitating loans and insurance are taxable as Business Auxiliary Service.

However, the Court set aside the penalty under Section 78 of the Finance Act, noting that the tax liability was satisfied before the show cause notice was issued, observing that there was "some confusion insofar as liability".

“There was some confusion insofar as liability and hence the assessee had not disclosed the income generated from the referral charges as Business Auxiliary Service in the service tax returns filed. The period under consideration was 2003-2004 to 2006-2007 and even if the notice can be issued within the extended period, the satisfaction of the liability prior to issuance of notice would commend us to set aside the penalty imposed. We see from the order of the Tribunal that penalty under Section 76 imposed was set aside by the Tribunal and we direct that the penalty under Section 78 also be set aside.”, the court observed.

Cause Title: M/S TVS MOTOR COMPANY LIMITED Versus COMMISSIONER OF CENTRAL EXCISE, CHENNAI-III

Citation : 2026 LiveLaw (SC) 833

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Appearance:

For Appellant(s) : Mr. R. Parthasarathy, AOR

For Respondent(s) :Mr. N Venkataraman, A.S.G. Mrs. Nisha Bagchi, Sr. Adv. Mr. Gurmeet Singh Makker, AOR Mrs. Sadhna Sandhu, Adv. Mr. Kartikeya Asthana, Adv. Mr. Udai Khanna, Adv. Mr. Sarthak Karol, Adv. Mr. Shaurya Rai, Adv.