Facts
The appellant, an automobile dealer, received “referral charges” from banks and an insurance company in respect of customers who obtained motor vehicle loans and insurance policies through the appellant. The Department treated these receipts as taxable Business Auxiliary Service under S.65(105)(zzb) of Chapter V of the Finance Act, 1994.
The appellant had paid the entire tax liability before issuance of the show-cause notice dated 02.04.2008. The Department nevertheless invoked the extended limitation period and imposed penalty.
Issues
Whether the referral charges received by the appellant were taxable under S.65(105)(zzb) of Chapter V of the Finance Act, 1994 as Business Auxiliary Service.
Whether the Department was entitled to invoke the extended limitation period on the allegation that the appellant had suppressed the turnover.
Whether penalty under S.78 was sustainable when the tax liability had been discharged before issuance of the show-cause notice.
Court’s Reasoning
(a) Taxability of referral charges:
The Court examined the agreements with HDFC Bank, ICICI Bank and Oriental Insurance Company. It held that the appellant was promoting the business of banks and the insurance company and received consideration for such promotion. The referral charges therefore constituted Business Auxiliary Service.
The Court relied upon the Larger Bench decision in M/s Pagaria Auto Center v. Commissioner of Central Excise, Aurangabad, which recognised that the assessee's activities constituted promotion and marketing of banking and financial services.
(b) Penalty:
Although the appellant had not disclosed the referral income as Business Auxiliary Service in its service-tax returns, the Court noted the existing confusion regarding taxability. More importantly, the entire tax liability had been discharged before the show-cause notice.
The Court applied S.73(3), which mandates that where the short-paid tax is paid before issuance of notice, the Department should desist from issuing the show-cause notice. In these circumstances, the Court set aside the penalty under S.78.
Held
The referral charges were taxable as Business Auxiliary Service. However, the penalty under S.78 was set aside because the tax liability had been paid before issuance of the show-cause notice. The appeal was partly allowed.
Conclusion
Where taxable liability is discharged before issuance of the show-cause notice, S.73(3) warrants setting aside the penalty, notwithstanding the taxability of the underlying service
Case Details
Citation: 2026 INSC 892
Decided on: 19 August 2026
Case Title: M/s TVS Motor Company Limited v. Commissioner of Central Excise, Chennai-III
Court: Supreme Court of India
Bench: J. B. Pardiwala, J.; K. Vinod Chandran, J.