Service tax on referral fees / commission

[Ganeshan Kalyani]

Dear Experts,

A manufacturing company has given reference of some of its customers who was in need of working capital to Bank. For providing such reference of prospective customers by company, the bank has given some amount of money as reward / referral fee / commission (whatever it can be called as) to the company. Now the query is whether service tax is applicable on such reward / referral fee / commission received by the Bank.

In my view, the company being manufacturer has not promoted or marketed about the Banks loan facility to the customers. A company has merely referred the details of prospective customers to the Bank and Bank has provided loan to those customers and a reward is credited to the company. In my view this does fall under ‘Business Auxiliary Service’ and therefore no service tax is warranted.

Request the experts to share their valuable views in this regard. Thanks.

[Ganeshan Kalyani]

Sir

Apologise. Please read as 'received by the company' in the last sentence of the first para.

And read as 'does not fall under business auxiliary service' in last sentence of second para.

Sorry for the mistake.

[Suryanarayana Sathineni]

Dear Kalyani Garu,

First of all, one has to come to conclusion whether the ingredients to qualify for service are present in the transaction.

If , the answer is yes then to check for taxability and exemption if, any available and to proceed accordingly.

Best Regards

Suryanarayana

[KASTURI SETHI]

Sh.Ganeshan Kalyani Ji,

Agreed with Sh.Surya Narayana, Sir. Regarding the ingredients/parameters :

1. There must be service provider.

2. There must be service receiver.

3. There must be consideration.

You may say reward or incentive or commission. It is consideration and it has boosted the bank business by way of reference. It will fall under the category of intermediary service/BAS.

This is my view.

[Ganeshan Kalyani]

Sir,

Thanks for your valuable advise.

[Rajagopalan Ranganathan]

Sir,

According to Section 65 B (44) of Finance Act 1994,-

"service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-

(a) an activity which constitutes merely,--

(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

(ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution; or

(iii) a transaction in money or actionable claim;

(b) a provision of service by an employee to the employer in the course of or in relation to his employment;

(c) fees taken in any Court or tribunal established under any law for the time being in force.

Therefore in your case the definition of service, that is, "service" means any activity carried out by a person for another for consideration is fully satified. Therefore you are liable to pay service tax on the commission earned by you. However if the commission earned is less than ₹ 10 lakhs during previous financial year or does not likely to exceed ₹ 10 lakhs during current financial year thenyou need not pay any service tax. Till you reach ₹ 9 lakhs limit you nedd not take registeration under Section 69 of Finance Act, 1994 read with Service Tax Rules, 1994.

[Ganeshan Kalyani]

Sir thanks for your opinion. Thanks.

AI Summary

Debate on Whether Commission for Referring Customers to Bank is Taxable Under Finance Act 1994 Section on Services A manufacturing company referred potential customers to a bank, which rewarded the company with a commission. The discussion seeks to determine if this commission is subject to service tax. One participant argues that since the company did not actively promote the bank's services, it should not fall under 'Business Auxiliary Service' and thus not be taxable. Others suggest that the commission qualifies as a service under the Finance Act 1994, making it taxable unless it falls below a specified threshold. The consensus leans towards the necessity of considering the transaction's nature to determine tax liability.