TVS Motor's Referral Charges Taxable as Business Auxiliary Service, But Penalty Set Aside

A Supreme Court division bench upheld service tax liability on TVS Motor's bank and insurer referral charges while setting aside penalty because the company paid its dues before the show cause notice was issued.

The Supreme Court has held that the “referral charges” collected by TVS Motor Company Limited from banks and an insurance company — when customers of the automobile dealer availed motor vehicle loans or took out insurance policies — are taxable as Business Auxiliary Service under Section 65(105)(zzb) of Chapter V of the Finance Act, 1994. At the same time, the Court set aside the penalty imposed under Section 78, finding that the entire tax liability had been deposited before the show cause notice was issued on 2 April 2008. The appeal, arising from Civil Appeal No. 7947 of 2013, was decided by Justice J. B. Pardiwala and Justice K. Vinod Chandran on 19 August 2026 and is reported as 2026 INSC 892.

How the Dispute Reached the Court

TVS Motor Company, a dealer in automobiles, entered into agreements with HDFC Bank, ICICI Bank, and Oriental Insurance Company. Under these arrangements, the company referred its customers to those institutions for motor vehicle loans and insurance policies. In return, TVS Motor received referral charges from the banks and the insurer.

The Commissioner of Central Excise, Chennai-III treated those referral charges as taxable consideration for Business Auxiliary Service and raised a demand covering the period 2003–2004 to 2006–2007. The Department also imposed penalties under Section 76 and Section 78 of the Finance Act, 1994, invoking the extended limitation period on the ground that TVS Motor had concealed the charges by recording them as “miscellaneous income” in its books rather than disclosing them as service tax turnover.

The Customs, Excise and Service Tax Appellate Tribunal upheld taxability and, separately, set aside the Section 76 penalty. Both sides carried the matter further, resulting in the civil appeal before the Supreme Court.

Taxability: Promoting the Business of Banks and Insurers

The Court affirmed the Tribunal's finding on taxability without disturbing it. Looking at the agreements with HDFC Bank, ICICI Bank, and Oriental Insurance Company, the Court found that the referral charges were received by TVS Motor precisely because it was promoting the business of those institutions among its customers.

The Court relied on the findings returned by the larger bench of the Tribunal in a related proceeding. That bench had examined the transactional documents and found a “close association of the assessee with banks/financial institutions for promotion and marketing of banking and financial services.” The agreements required TVS Motor to inform its dealers and authorised service centres about the financial arrangements available, and to “sensitise customers about the lending facilities offered by financial institutions.” On that factual matrix, the Tribunal's larger bench had concluded that TVS Motor was a link in the economic activity carried on by the banks and insurer and was providing taxable Business Auxiliary Service.

The Supreme Court accepted this analysis. The assessee was promoting and marketing services of the banks and the insurance company; the referral charges were the stipulated consideration under the agreements for that promotional activity. Section 65(105)(zzb) of the Finance Act, 1994 was squarely attracted.

Suppression and the Extended Limitation Period

On the question of suppression, the Department argued that TVS Motor had deliberately classified the referral charges as miscellaneous income, keeping them out of its service tax returns. Ms. Nisha Bagchi, Senior Counsel for the Department, submitted that the company was well aware of the Finance Act, 1994 provisions and that accepting commission for client referrals to banks and insurers could not be treated as something outside the ambit of taxable services.

Counsel for TVS Motor, Ms. Charanya Lakshmikumaran, countered that there had been genuine confusion about whether such charges were taxable at all. She pointed to divergent rulings by various Tribunals before the issue was settled by the larger bench decision in M/s. Pagaria Auto Center v. Commissioner of Central Excise, Aurangabad, reported at 2014 (33) S.T.R. 506 (Tri. – LB).

The Court did not categorically decide whether invoking the extended limitation period was justified, because the penalty question was resolved on a different, more immediate ground.

Penalty Under Section 78 Set Aside: Payment Before Notice

The decisive question on penalty was whether TVS Motor had cleared its tax liability before the show cause notice was issued. The Court found that it had. Four payments were made prior to the notice dated 2 April 2008:

• Rs. 1,81,560 deposited on 31 March 2005
• Rs. 1,02,07,017 deposited on 4 November 2006
• Rs. 19,27,172 deposited on 21 February 2007
• Rs. 23,86,085 deposited on 30 March 2007

Sub-section (3) of Section 73 of the Finance Act, 1994 provides that where there is short levy or short payment of tax, and the tax liability is satisfied prior to the issuance of a show cause notice, the Department should desist from issuing such a notice. The Court read this provision as also bearing on the penalty question.

The Court accepted that there was some confusion about whether the referral charges fell within Business Auxiliary Service, which explained why TVS Motor had not separately disclosed that income in its service tax returns for the relevant period. Given that the entire liability was paid before the notice, the Court held that the penalty under Section 78 ought not to have been sustained. The Tribunal had already set aside the Section 76 penalty; the Supreme Court extended that relief to Section 78 as well.

Outcome

The appeal was partly allowed. The Court upheld the finding that the referral charges received by TVS Motor Company from HDFC Bank, ICICI Bank, and Oriental Insurance Company are taxable as Business Auxiliary Service under Section 65(105)(zzb) of the Finance Act, 1994. It directed that the penalty under Section 78 be set aside, in addition to the Section 76 penalty already set aside by the Tribunal below. All pending applications were disposed of.