TVS Motor: Supreme Court Upholds Service Tax on Referral Charges, Sets Aside Penalty

The Supreme Court has ruled that referral charges earned by TVS Motor Company Limited for facilitating vehicle loans and insurance policies are taxable as Business Auxiliary Service (BAS) under the Finance Act, 1994. However, the Court set aside the penalty imposed on the company, noting that the entire service tax liability was discharged before the show-cause notice was issued.

A Division Bench of Justices J.B. Pardiwala and K. Vinod Chandran delivered the judgment on August 19, 2026, partly allowing the appeal filed by TVS Motor against the Commissioner of Central Excise, Chennai-III.

The Core Dispute: What Are Referral Charges?

During the financial years 2003–2004 to 2006–2007, TVS Motor received payments—termed 'referral charges'—from HDFC Bank, ICICI Bank, and Oriental Insurance Company whenever its customers availed of motor vehicle loans or purchased insurance policies through the company's facilitation. TVS Motor recorded these sums as 'miscellaneous income' and did not declare them as taxable service income in its service tax returns.

The Department of Central Excise issued a show-cause notice on April 2, 2008, alleging that these charges were consideration for promoting the business of the banks and the insurance company, thereby falling under the definition of Business Auxiliary Service under Section 65(105)(zzb) of the Finance Act. The Department invoked the extended limitation period on grounds that TVS Motor had suppressed its turnover.

Arguments from Both Sides

TVS Motor's Plea:
Counsel Ms. Charanya Lakshmikumaran argued that the company had paid the entire service tax liability—amounting to over ₹1.47 crore—through deposits made between March 2005 and March 2007, well before the show-cause notice. She contended that under Section 73(3) of the Finance Act, such pre-notice payment absolves the assessee from penalty. She also highlighted the confusion prevailing across various tribunals regarding the taxability of referral income, which was later settled by a larger bench in M/s. Pagaria Auto Center v. Commissioner of Central Excise, Aurangabad .

Department's Stand:
Senior Counsel Ms. Nisha Bagchi countered that TVS Motor deliberately classified the referral income as 'miscellaneous income'—a clear act of suppression. She argued that the company was well aware of its service tax obligations, and the commission received for directing customers to lenders and insurers could not escape taxation. Therefore, the penalty was justified.

Taxability Upheld: Promoting Business of Banks and Insurers

The Supreme Court, examining the agreements between TVS Motor, the banks, and the insurance company, held that the referral charges were indeed consideration for promoting the business of those financial institutions. The Bench observed:

"The assessee is promoting the business of the banks and the insurance company for which they receive an amount as stipulated in the agreement."

The Court endorsed the findings of the larger bench in Pagaria Auto Center , which had analyzed TVS Motor's role and concluded:

"The assessee was promoting and marketing the services of banks and insurance companies, was a link in the economic activity carried on by them and was therefore providing the taxable BAS."

Thus, the levy of service tax on the referral charges was sustained.

Penalty Set Aside: Pre-Notice Payment and Genuine Confusion

On the penalty aspect, the Supreme Court invoked Section 73(3) of the Finance Act, which mandates that if the tax liability is satisfied before the issuance of a show-cause notice, the Department should desist from issuing such a notice. The Court noted that TVS Motor had deposited the following amounts before the April 2, 2008 notice: ₹1,81,560 on March 31, 2005; ₹1,02,07,017 on November 4, 2006; ₹19,27,172 on February 21, 2007; and ₹23,86,085 on March 30, 2007.

The Bench acknowledged that there was genuine confusion regarding the taxability of referral charges during the relevant period. It stated:

"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."

Since the Tribunal had already set aside the penalty under Section 76, the Supreme Court directed that the penalty under Section 78 also be set aside.

Final Decision and Implications

The Supreme Court partly allowed the appeal. While upholding the taxability of referral charges as Business Auxiliary Service, it set aside the penalty under Section 78 of the Finance Act, 1994. The ruling clarifies that automobile dealers acting as intermediaries for banks and insurance companies are providing taxable services, but also reaffirms that timely payment of tax before a notice can shield assessees from penal consequences, especially when the legal position was unsettled.

The judgment provides important guidance for dealers in the automobile sector regarding their service tax obligations on referral income and the significance of pre-notice compliance.