The Hindu Business Line : Ad in tax fine-print

ADVERTISING was one of the first services to be brought into the service tax net. Since then, it has turned out to be one of the marquee services apart from being blockbuster revenue grosser for the Government.

The initial notion that the levy was only on pure-play advertising agencies which spilled colours to make out an advertisement. This was further strengthened through judicial decisions, such as the one in Commissioner vs Team UPD Ltd (2005 179 ELT 469), wherein it was held that mere selling of space could not be tantamount to providing a service.

But Circular No F.No.341/43/2005-TRU changed this impression, stating that an advertising agency obtaining space and time in getting an advertisement published in any sort of media would be a taxable service. The argument was that the services provided by the media were actually received by the advertising agency and used as an input service for providing the taxable service to the client.

Advertising agencies negotiate the rate and other terms and conditions with the media for obtaining the space for advertisement. Advertising agency and the media are the two parties involved in the transaction and contractual obligations exist only between the two. The ad agency, as per the contract, is responsible for paying the amount to the media for getting the advertisement published. The client is not party to the transaction or contract with the media and, hence, does not have any legal obligation towards the media in relation to the said transaction.

The transaction between the advertising agency and the media is on principal-to-principal basis. The ad agency is not acting as an agent of the client in such transactions. The service provided by the agency to its client is a composite and single service and use of advertisement space as an input service cannot be treated independently as a service separately provided on client's own account. There is no legal requirement for the advertising agency to specifically mention the actual payment made to the media in the invoice issued to the client.

Whether or not the amount paid or payable to the media by an advertising agent is separately mentioned in the invoice is not relevant. The ad agency does not necessarily receive the exact amount paid or payable to the media from the client. In other words, the ad agency does not act as an agent of the customer when it pays the amount to the media. Inputs or input services are integral part of the taxable service provided and the value of all such inputs and input services are liable to be included in determining the consideration for the purpose of levy of service tax.

While so much action was happening on the hardcopy front, the softcopy version could not be left much behind. Google sought an opinion from the Authority for Advance Rulings whether selling advertisement space on its search site to Indian entities would attract service tax. The search engine company took a familiar tack — it was not in the business of making or displaying advertisements but in space-selling activity.

The service tax department countered by saying that the definition of advertising service was wide enough to include providing advertisement space on the Internet. The AAR ruled in favour of the department, stating that the company would be classified as an advertising agency and the services provided by it would come under the purview of service tax.

The AAR decision is bound to upset the applecart of many an advertising agency. With no clear definition of `services' anywhere, the field is left wide open for the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) and the courts to debate on this.

Budget 2006 provides an opportunity for the Finance Minister to iron out the creases in the service tax regime.

(The author is a Hyderabad-based chartered accountant.)

More Stories on : Taxation | Advertising

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Power conflict

Inter-company deals cross-country

Ad in tax fine-print

Fast Becoming a Trauma

Will the taxman read first chapter in history of medicine?

Rendition for Dawood Ibrahim?

Value opportunities lie at the edges

Sea-change in Puri