The Supreme Court has held that referral charges received by M/s TVS Motor Company Limited from banks and an insurance company for facilitating vehicle loans and insurance policies constitute taxable Business Auxiliary Service (BAS) under Section 65(105)(zzb) of the Finance Act, 1994. At the same time, the Court granted substantial relief to the assessee by setting aside the penalty imposed under Section 78, noting that the service tax liability had already been discharged before issuance of the show cause notice.
Case Details
Case: M/s TVS Motor Company Limited v. Commissioner of Central Excise, Chennai-III
Court: Supreme Court of India
Case No.: Civil Appeal No. 7947 of 2013
Citation: 2026 INSC 892
Date of Judgment: 19 August 2026
Coram: Justice J.B. Pardiwala and Justice K. Vinod Chandran
Judgment by: Justice K. Vinod Chandran
Issues Before the Supreme Court
The appeal raised two principal questions. First, whether referral charges received by TVS Motor in connection with loans obtained and insurance policies taken by its customers were taxable as Business Auxiliary Service. Second, whether the circumstances justified invocation of the extended limitation period on the ground that the assessee had suppressed taxable turnover.
Referral Charges Constitute Business Auxiliary Service
TVS Motor had entered into arrangements with HDFC Bank, ICICI Bank and Oriental Insurance Company. Under these arrangements, customers purchasing vehicles were informed about financing and insurance facilities offered by those institutions, and TVS Motor received referral charges when customers availed such loans or insurance policies.
The Supreme Court agreed with the Tribunal that such activity amounted to promotion and marketing of the services of the banks and the insurance company. The assessee was therefore providing a taxable Business Auxiliary Service.
The Court noted that TVS Motor and its dealer network were required to inform customers about the availability of financial facilities and sensitise them about lending facilities offered by the concerned financial institutions. This established a direct nexus between the activities performed by TVS Motor and the promotion of banking, financial and insurance services.
Accordingly, the Court upheld the finding that the referral charges were liable to service tax under the Business Auxiliary Service category.
Service Tax Paid Before Show Cause Notice
A significant aspect of the judgment concerned the penalty proceedings. The show cause notice was issued on 2 April 2008. However, TVS Motor had already discharged the service tax liability through payments made on different dates before issuance of the notice, including payments of ₹1,81,560, ₹1,02,07,017, ₹19,27,172 and ₹23,86,085.
The Supreme Court referred to Section 73(3) of the Finance Act, 1994, which provides that where service tax has not been levied, paid, short-levied or short-paid, but the taxpayer pays the amount before service of notice, the Department is ordinarily required to desist from issuing a show cause notice in respect of the amount so paid.
Court Recognises Contemporary Dispute Over Taxability
The Court also took into consideration that there had been uncertainty regarding the taxability of such referral activities. Different Tribunal decisions had taken differing views before the controversy was ultimately settled by the Larger Bench in M/s Pagaria Auto Center v. Commissioner of Central Excise, Aurangabad, 2014 (33) S.T.R. 506 (Tri.-LB).
The period involved in the TVS Motor dispute was 2003-04 to 2006-07. The Court observed that although the assessee had not disclosed the referral income as Business Auxiliary Service in its service tax returns, there was some confusion during the relevant period concerning the liability itself.
Section 78 Penalty Set Aside
While the Supreme Court did not disturb the taxability of the referral charges and observed that the notice could be issued within the extended period, it considered the prior payment of the entire tax liability significant for determining the penalty.
The Tribunal had already set aside the penalty imposed under Section 76. The Supreme Court went further and directed that the penalty imposed under Section 78 of the Finance Act, 1994 also be set aside.
Thus, although TVS Motor did not succeed on the substantive issue of taxability, it obtained relief from the penalty consequences.
Key Legal Principle
The judgment establishes that where an automobile dealer facilitates or promotes financing and insurance services offered by banks, financial institutions or insurance companies and receives consideration in the form of referral charges, such activity can constitute Business Auxiliary Service under the erstwhile service tax regime.
At the same time, payment of the tax liability before issuance of the show cause notice, particularly where a genuine interpretational dispute existed regarding taxability during the relevant period, may have an important bearing on the sustainability of penalties under the Finance Act, 1994.
Decision
The Supreme Court partly allowed the appeal. It upheld the finding that referral charges received by TVS Motor were taxable as Business Auxiliary Service but set aside the penalty imposed under Section 78. The penalty under Section 76 had already been set aside by the Tribunal.
