The Hindu Business Line : An encroachment into space and time

ADVERTISEMENT bills are set to go up when the Government issues formally the draft circular specifying that the value of taxable service of an advertising agency is the gross amount billed inclusive of the amount paid by the advertising agency to the print or the electronic media for obtaining space and time to get advertisements published, displayed or exhibited.

This circular is sought to be issued superseding Circular F.No.341/43/96 of October 31, 1996, Circular F.No.345/4/97 (August 16, 1999) and Circular F.No.168/01/2003-CX.4 ( October 28, 2003).

Circular No. 341/43/96 clarified that for an advertising agency, the service tax is to be computed on the gross amount charged by the agency from the client for making or preparing the advertisement material and that the amount paid, excluding the agency commission, by the advertising agency for space and time in getting the advertisement published in the print or electronic media will not be includible in the value of taxable service for the purpose of levy of service tax levy.

The commission received by the advertising agency would, however, be includible in the value of taxable service.

Circular No. 3345/4/97 clarified that printing and printing and publishing telephone directories, Yellow pages or business directories, being essentially of printing a readymade advertisements from the advertisers and publishing the same in the directory, shall not attract service tax and that if any activity relating to making or preparation of an advertisement, such as designing, visualising, conceptualising, and so on, is undertaken, such activity would be liable to service tax on the charges made thereon.

Circular No. F.No.168/01/2003 discussed the meaning of the term "Canvassing".

It was clarified that if the canvassing is limited to space selling, then such services would not be liable to any service tax.

However, if canvassing involves receiving the text of advertisement, estimating the space that such advertisement would occupy in the newspaper/periodical/magazine, negotiating the price, and forming the general layout of the advertisement that would finally appear in the newspaper, then such activity would be liable to service tax under the category `Advertising Agency Services'.

The draft circular, by including the cost of space and time in the value of taxable service, appears to go traverse beyond the scope of the value of taxable service as in Section 67 of the Finance Act, 1994.

In Advise Advertising Private Ltd vs Union of India (131 ELT 529), the assessee challenged the portion of Circular F.No.341/43/96 specifying that the commission received by the advertising agency from the print or electronic media would be includible in the value of the taxable service.

The Madras High Court observed that the extent of the actual charges of the advertisement charged by the media is obviously not a service rendered by the advertising agency.

The court held that the circular specifying the inclusion of commission in the value of taxable service was neither contrary to nor enlarged the scope of Section 67(d) of Finance Act, 1994, hence not ultra vires the section.

"The amount, which is spent for flashing an advertisement in a particular print media or electronic media, cannot be said to have been paid towards the services rendered by the advertising agency. It is simply a consideration paid to that print media or electronic media, as the case may be, for flashing that advertisement.

"However, when an advertising agency gets some `Commission', though out of the consideration received by the media, it is because that advertising agency has selected that particular media for flashing the advertisement, which is nothing but a `Service' by that advertising agency. `In relation to the advertisement given to the client', in whose benefit the said advertisement is flashed.

"Therefore, we have no hesitation to hold that any commission earned by the agency even from the advertising media, if it forms a part of the gross amount charged by such agency from the clients in relation to that advertisement, could be included in the value of the taxable service. When we see the impugned circular/letter, it explains precisely this position and nothing more."

While the High Court observed that the amount spent for placing advertising in a media is not a service rendered by the advertising agency, the draft circular reasons the cost of advertisement space as an input service and cannot be treated independently as a service separately provided on client's own account.

Even if the Circular is issued and held to be in consonance with the service tax legislation, the authorities should issue clear instructions and apply the circular prospectively. Else, the assessees would be flooded with show-cause notices for past periods, though it could be argued that the current circular is in "supersession" of earlier circulars implying that the earlier circulars hold fort till the revised circular is issued.

Nevertheless, relief is on hand by way of the following decisions:

In MRF Ltd vs CCE, Cochin (115 ELT 374), it was held that circular withdrawing earlier instructions of the Board will have prospective effect and that any clarification cannot have retrospective effect.

In the Paper Products (112 ELT 765) case, the Supreme Court held that in the event of any change in the Department's stand through amendments or fresh circulars, the period prior to the change would be governed by the earlier circular.

Volte-face now appears to be a routine with service tax administrators.

This draft circular comes close on the heels of the circular clarifying that maintenance, repair or servicing of all computer software is taxable and that the service provided by money changers in relation to foreign exchange is covered under the banking and financial service.

(The author, a Madurai-based chartered accountant, is a VAT and service tax consultant. E-mail: sridharan@stvat.com)

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