SC rules referral fees earned by auto dealers from banks, insurers are taxable
August 20, 2026
The ruling came in a case involving TVS Motor, which had challenged the levy of service tax on referral income earned from banks and insurance companies during FY04 to FY07.
The Supreme Court on Wednesday, August 19, ruled that referral fees earned by automobile dealers from banks and insurance companies for facilitating vehicle loans and insurance policies are taxable as a ‘business auxiliary service’ under the Finance Act, 1994.
A Bench of the apex court held that automobile dealers, by referring customers to lenders and insurers, promote the business of those entities and receive consideration in return. Such referral charges therefore fall within the ambit of taxable services under Section 65(105)(zzb) of Chapter V of the Finance Act, 1994.
The ruling came in a case involving TVS Motor, which had challenged the levy of service tax on referral income earned from banks and insurance companies during FY04 to FY07.
While upholding the taxability of the referral charges, the Supreme Court granted relief to TVS Motor on the penalty imposed by the tax department.
The court noted that the company had discharged its entire service tax liability before the issuance of a show-cause notice. Under Section 73(3) of the Finance Act, authorities should refrain from issuing a show-cause notice where the assessee has paid the tax dues before such notice is served, it said.
As a result, the court set aside the penalty levied on TVS Motor.
The company had argued that there was ambiguity regarding the tax treatment of referral income and that it had not disclosed the amounts under the category of business auxiliary services in its service tax returns. According to TVS Motor, the issue related to a period when the legal position on the taxability of such income was not clear.
The tax department, however, contended that the company had classified the referral income as miscellaneous income and had deliberately failed to disclose it as taxable service income. It argued that the provisions of the Finance Act were clear and that referral commissions received for directing customers to banks and insurers were liable to service tax.
Rejecting the company's challenge on the tax demand, the Supreme Court held that referral fees received from banks and insurance companies constituted consideration for promoting their business. However, it ruled that no penalty could be sustained since the tax liability had been settled before the issuance of the notice.
[CNBC TV18]
