The Supreme Court has ruled that referral payments earned by automobile dealers from banks and insurance companies for helping customers secure vehicle loans and insurance policies are liable to service tax as “Business Auxiliary Service” under the Finance Act, 1994.
A bench comprising Justice J.B. Pardiwala and Justice K. Vinod Chandran held that dealers receiving such payments are effectively promoting the business of financial institutions and insurers, making the earnings taxable under the service tax regime.
The case arose from the activities of TVS Motor Company Ltd., which received referral charges from HDFC Bank, ICICI Bank and Oriental Insurance Company. The payments were linked to customers who obtained vehicle loans or insurance policies with the dealer’s assistance.
The tax department treated these earnings as consideration for Business Auxiliary Service under Section 65(105)(zzb) of the Finance Act, 1994.
TVS Motor Company challenged the levy, arguing that the referral amounts should not be subjected to service tax. The company had, however, paid the entire disputed tax before the department issued a show-cause notice on April 2, 2008.
The Supreme Court agreed with the view taken by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) that the referral charges fell within the taxable category.
The Court also relied on the earlier CESTAT ruling in M/s Pagaria Auto Center v. Commissioner of Central Excise, Aurangabad, which had similarly held that amounts received by automobile dealers for facilitating vehicle loans and insurance constituted Business Auxiliary Service.
While upholding the tax demand, the Court took a different view on the penalty.
The bench noted that the dispute concerned the period from 2003-04 to 2006-07 and that there had been uncertainty over the taxability of such referral income. Since the company had already discharged the tax liability before receiving the show-cause notice, the Court found sufficient grounds to remove the penalty imposed under Section 78 of the Finance Act.
The Court also noted that CESTAT had already set aside the penalty under Section 76 and directed that the Section 78 penalty be removed as well.
The ruling therefore draws a clear line between the taxability of referral income and the imposition of penalties: the referral charges remain subject to service tax, but in circumstances where the taxpayer had already paid the dues amid uncertainty over the legal position, the penalty may not survive.
