HDFC Bank subvention from vehicle dealers held liable to service tax as Business Auxiliary Service

Overview of the dispute

In HDFC Bank Ltd. Vs Commissioner of Cen. Excise (CESTAT Mumbai) (Service Tax Appeal No. 85741 of 2014, order dated 13/09/2019), the Mumbai Bench of CESTAT examined whether amounts booked by HDFC Bank as “subvention income” from vehicle manufacturers and dealers should suffer service tax under the head “Business Auxiliary Service” (Section 65(19) read with Section 65(105)(zzb) of the Finance Act, 1994).

The controversy arose pursuant to an EA‑2000 audit covering 2008-11. HDFC Bank, engaged in vehicle financing, had arrangements with vehicle manufacturers/dealers under which:

• Vehicle purchasers obtained loans from the Bank at nil or concessional interest rates, and
• Vehicle manufacturers/dealers compensated the Bank for this concessional lending by paying amounts described as subvention income.

The Bank and the dealers also jointly advertised these special finance schemes and the Bank availed CENVAT credit on its share of advertisement cost.

The adjudicating Commissioner, Central Excise Thane‑II, confirmed a service tax demand of Rs 36,26,02,574 under Section 73(2) along with interest under Section 75, and imposed:

• Equivalent penalty under Section 78, and
• Penalties under Section 77(2) for filing incorrect ST‑3 returns.

The show cause notice dated 06.02.2013 invoked the extended period under the proviso to Section 73(1) and proposed interest and multiple penalties.

The Tribunal ultimately dismissed the appeal and upheld the tax, interest and penalties.

Factual matrix and demand background

Business model and subvention receipts

The EA‑2000 audit revealed the following key features of HDFC Bank’s business model:

• The Bank provided vehicle loans in tie‑up with multiple authorised dealers/manufacturers.
• For promoting these finance-linked vehicle sales, joint advertisements were issued featuring both the Bank and the dealer/manufacturer.
• Advertisement expenditure was shared; the Bank availed CENVAT credit on its portion.
• For every vehicle financed under such special schemes, the Bank received a fixed amount per vehicle from the manufacturer/dealer, recorded in the books as subvention income (not as commission).

Revenue noted the following subvention income figures and corresponding service tax involved for the relevant period:

The Department took the view that by offering low or zero interest finance exclusively to customers of particular dealers/manufacturers and participating in joint marketing of such schemes, HDFC Bank was promoting the sales of those dealers/manufacturers. Therefore, the receipts from them were treated as consideration for Business Auxiliary Service.

A detailed show cause notice dated 06.02.2013 invoked the proviso to Section 73(1) to demand unpaid service tax, interest under Section 75, and penalties under Sections 76, 77 and 78.

Commissioner’s adjudication

By Order in Original No. 08/AC/Commr/Th -II/ST/2013 dated 02.12.2013, the Commissioner concluded as follows:

1. Tax demand

   • Confirmed service tax of Rs 36,26,02,574 under Section 73(2) of the Finance Act, 1994, along with interest under Section 75.

2. Penalty under Section 78

   • Imposed an equivalent penalty of Rs 36,26,02,574 under Section 78 on grounds of suppression/misstatement warranting extended period.

3. Penalties under Section 77(2)

   • For incorrect ST‑3 returns filed for April 2008 to March 2011, a penalty of Rs 5,000 per infraction.
   • For April 2011 to March 2012, a penalty of Rs 10,000 per default under Section 77(2) for continuing incorrect return filing.

HDFC Bank challenged this order before the Tribunal.

Assessee’s key arguments before CESTAT

1. Subvention represents interest on lending, not a service fee

The assessee contended that the core transaction was lending money to vehicle purchasers. In a standard loan, the assessee would collect interest from the borrower. Under the subvention schemes:

• The borrower paid reduced or nil interest,
• The dealer/manufacturer made good the shortfall by paying the Bank, and
• This compensation was taxable as interest income on loans, not as consideration for a service.

The assessee argued that in terms of judicial interpretation (including Cauvery Spinning and Weaving Mills Ltd [340 ITR %%]) and the definition of “interest” introduced in Section 65B(30), interest covers any amount payable in respect of money borrowed or debt incurred, regardless of who actually pays it.