Referral charges for arranging loans and insurance constitute taxable Business Auxiliary Service.

M/s TVS Motor Company Limited, an automobile dealer, received “referral charges” from HDFC Bank, ICICI Bank and Oriental Insurance Company when its customers obtained vehicle loans or insurance policies through arrangements facilitated by the appellant.

The Department treated these receipts as consideration for promoting and marketing the business of banks and the insurance company, taxable as Business Auxiliary Service under Section 65(105)(zzb), Chapter V of the Finance Act, 1994.

Although the appellant paid the service-tax liability in instalments between 31 March 2005 and 30 March 2007, it had not disclosed the referral-charge income as Business Auxiliary Service in its service-tax returns. A show-cause notice was issued on 2 April 2008. The Tribunal upheld taxability; it set aside the penalty under Section 76 but maintained penalty under Section 78, leading to the present appeal.

Whether referral charges received by the appellant from banks and an insurance company for facilitating vehicle loans and insurance policies constituted taxable Business Auxiliary Service under Section 65(105)(zzb) of the Finance Act, 1994?

Whether the appellant’s failure to disclose the referral-charge income justified invocation of the extended limitation period and imposition of penalty under Section 78, notwithstanding payment of the entire tax liability before issuance of the show-cause notice?

Section 65(105)(zzb) of Chapter V of the Finance Act, 1994 treated services provided to a client in relation to Business Auxiliary Service as taxable; promoting or marketing the services of banks, financial institutions and insurance companies falls within that taxable category.

Under Section 73(3), where short-paid service tax and applicable interest are paid before service of a show-cause notice, the Department is generally required to refrain from issuing such notice.

The Court also considered the statutory penalties under Sections 76 and 78 of the Finance Act, 1994. It noted the prevailing uncertainty regarding the taxability of such referral activities, which was subsequently addressed by the Larger Bench decision in Pagaria Auto Center v. Commissioner of Central Excise, Aurangabad, 2014 (33) S.T.R. 506 (Tri.–LB).

The agreements with HDFC Bank, ICICI Bank and Oriental Insurance Company showed that the appellant was required to inform its dealers, service centres and vehicle purchasers about the availability of loan and insurance facilities, and to facilitate access to those services. The appellant therefore acted as a link in the commercial activity of the banks and insurer and promoted their services in return for stipulated referral charges. The receipts consequently had a direct nexus with the provision of Business Auxiliary Service and were taxable under Section 65(105)(zzb).

However, the Court took into account that the entire tax liability had been discharged before the show-cause notice was issued and that there was genuine confusion concerning the taxability of referral charges, as reflected in differing Tribunal views and the later Larger Bench ruling.

In these circumstances, although the appellant had not reported the receipts under the relevant taxable-service category, the pre-notice payment and the surrounding legal uncertainty justified setting aside the penalty under Section 78. The Tribunal had already set aside the penalty under Section 76.

However, considering that the tax liability had been fully paid before issuance of the show-cause notice and that there was uncertainty regarding the taxable character of the services, the Court directed that the penalty under Section 78 also be set aside; the penalty under Section 76 had already been set aside by the Tribunal. The appeal was therefore partly allowed, with pending applications disposed of.