Supreme Court Upholds TVS Motor's Referral Charges As Business Auxiliary Service, Sets Aside Penalty

The Supreme Court on 19 August held that TVS Motor Company Limited was liable to pay service tax on referral charges it received from banks and an insurance company for facilitating vehicle loans and insurance policies, treating the charges as Business Auxiliary Service under the Finance Act, 1994.

However, the Division Bench comprising Justices J.B. Pardiwala and K. Vinod Chandran set aside the penalty imposed on the company under Section 78 of the Finance Act, after finding that it had paid the entire service tax liability before the authorities issued the show-cause notice. The judges held:

“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 dispute concerned referral charges TVS Motor Company Limited received when its customers obtained vehicle loans from banks or purchased insurance policies through arrangements facilitated by the company.

The Supreme Court agreed with the Tribunal that the referral charges attracted service tax as Business Auxiliary Service. It noted that TVS had agreements with HDFC Bank, ICICI Bank and Oriental Insurance Company and received payments when its customers availed themselves of loans or insurance policies from these institutions.

Further, the Bench observed that TVS effectively promoted the business of the banks and insurance company and received consideration for doing so. It referred to a Larger Bench decision of the Tribunal, which found that the company acted as a link in the economic activity of banks and insurance companies by promoting and marketing their services.

On the penalty, the judges noted that the authorities issued the show-cause notice on 2 April 2008, while TVS had already paid the service tax liability through deposits made between March 2005 and March 2007.

The Bench also noted that the parties faced some confusion regarding the taxability of referral charges during the relevant period from 2003-04 to 2006-07. Consequently, TVS did not disclose the referral income as Business Auxiliary Service in its service tax returns. It held that even if the authorities could have invoked the extended limitation period to issue the notice, TVS's payment of the entire tax liability before the notice justified setting aside the penalty. Since the Tribunal had already set aside the penalty under Section 76 of the Finance Act, 1994, the Court also set aside the penalty under Section 78.

Accordingly, the Supreme Court partly allowed TVS Motor Company's appeal. It set aside the penalty under Section 78 while upholding the taxability of the referral charges as Business Auxiliary Service.

Appearances: Ms. Charanya Lakshmikumaran, learned Counsel for the appellant (TVS Motor Company Limited); Ms. Nisha Bagchi, learned Senior Counsel for the Department/Revenue.