M/s TVS Motor Company Limited v. Commissioner of Central Excise, Chennai-III

What happened

The appeal raised two questions: whether the referral charges obtained by the appellant, a dealer in automobiles, for loans availed and insurance policies taken by customers, were taxable under section 65(105)(zzb) of the Finance Act, 1994 as Business Auxiliary Service, and whether the appellant had suppressed turnover so that the extended limitation period could be invoked. The appellant said it had paid the entire liability before the notice; the Department said the charges were deliberately shown as miscellaneous income. The agreements were with HDFC Bank, ICICI Bank and Oriental Insurance Company. The period was 2003-2004 to 2006-2007.

Questions before the court

• Are referral charges received from banks and an insurer taxable as Business Auxiliary Service, and can a penalty be imposed where the tax was paid before the notice?

Why the court ruled this way

The Court agreed with the Tribunal, which had examined the agreements elaborately and held that the charges, received for promoting the business of the banks and the insurance company, are Business Auxiliary Service (paragraph 4). It noted that a larger bench of the Tribunal had also found so (paragraph 5). On penalty, the show-cause notice was issued on 2 April 2008, before which the tax was paid in instalments of ₹1,81,560 on 31 March 2005, ₹1,02,07,017 on 4 November 2006, ₹19,27,172 on 21 February 2007 and ₹23,86,085 on 30 March 2007. Section 73(3) provides that if the liability is satisfied before the notice, the department should desist from issuing it. There was confusion about the liability, which explained why the income was not shown in the service tax returns, and satisfaction of the liability before the notice meant no penalty (paragraph 6).

Controlling point

The referral charges are Business Auxiliary Service, but because the tax was paid before the show-cause notice and there was genuine confusion about taxability, no penalty could be imposed.

Order and next steps

The appeal was partly allowed, sustaining the tax and setting aside the penalty. Pending applications were disposed of.

Practical implications

A dealer receiving commission or referral charges from banks or insurers should treat them as a taxable service for the period concerned; paying the tax with interest before any notice can protect against penalty under section 73(3) of the Finance Act.

Limits of this ruling

• The ruling concerns the Finance Act, 1994 as it stood for 2003-2004 to 2006-2007 and the facts of this dealer; the order extracts only part of the Tribunal's reasoning.