The Hindu Business Line : Is trade discount liable to withholding tax?

In this era of global competition, media plays a significant role in enabling products of advertisers to reach their target audience. Whilst differentiating competitor’s products, media equally plays an important role in creating brand loyalty.

An important link between the advertisers and the media are the ‘ad-agencies’. These ad-agencies normally provide a variety of services to various advertisers, thus functioning as independent professional bodies. Generally, as a matter of industry practice, media players (newspaper/magazine publishers, etc) offer substantial trade discount to ad-agencies for encouraging them to secure more advertisements.

Penal consequences

Typically the trade discount offered to ad-agencies constitutes 15-25 per cent of the total advertisement charges paid for publishing/displaying advertisements. On various occasions, the Indian income-tax authorities have endeavoured to characterise such ‘trade discounts’ as ‘commission’, liable to withholding tax obligation under Section 194-H of the Income-Tax Act, 1961.

As a consequence, the media players have suffered disallowances under Section 40(a)(ia) of the Act for non-withholding of income-tax from such ‘trade discounts’. In addition, media players are also suffering additional interest and penal consequences.

Recently, the Kolkata tribunal had the opportunity to decide on a similar issue in the ABP (P) Ltd case. ABP was a publisher of newspapers and magazines with main source of revenue from advertisements. ABP received advertisements directly from advertisers as well as from ad-agencies [members of the Indian Newspaper Society (INS)].

The relationship between the ad-agencies and ABP was governed by the rules and regulations framed by INS, which, inter alia, allowed 15 per cent trade discount to be granted to ad-agencies. ABP raised and booked invoice on ad-agencies for net consideration (that is, net of 15 per cent discount).

ABP’s assessing officer (AO) passed an order holding ABP as ‘an assessee in default’ for failing to withhold income-tax from trade discounts, since the trade discount represented ‘commission’ of the ad-agencies. The AO was of the view that ad-agencies were the ‘agents’ of ABP, since ABP paid fixed percentage of consideration to ad-agencies for rendering services to advertisers on behalf of ABP. Thus, the AO concluded that trade discounts were in the nature of commission, while relying on the Delhi tribunal decision in the Bharti Cellular Ltd (105 ITD 129) case. The Commissioner (Appeals) upheld the AO’s order and the matter was taken up before the Kolkata Tribunal.

Advertising material

The tribunal analysed at length the nature of arrangement between ABP and ad-agencies, that is, the rules and regulations of INS and the terms and conditions governing their relationship.

It observed that the ad-agencies are independent bodies, free from control or interference/supervision of ABP. Further, the preparation of advertising material being purely a matter of understanding between the advertiser and the ad-agencies, ABP had no role to play therein. Relying on its own decision in the Samaj case (77 ITD 358) case, the tribunal held that the transaction between ABP and ad-agencies was on principal-to-principal basis. Therefore, trade discount given by ABP to ad-agencies cannot be characterised as ‘commission’, liable to withholding tax provisions of the Act. While arriving at this conclusion, the tribunal also distinguished the Delhi tribunal ruling in the Bharti Cellular case, holding that ad-agencies were not solely dependent upon, and not working under the control of ABP.

This issue has been a subject-matter of litigation in the past. The general underlying principle emanating from decisions in the past is that it is the nature of relationship between media players and the ad-agencies, and not the nomenclature of payment to ad-agencies, which would determine whether the same should be characterised as ‘trade discount’ or ‘commission’.

Decisive factor

It has also been observed that, on a plain reading of Clause (i) of the explanation to Section 194-H of the Act, the expression ‘commission and brokerage’ is used not only in juxtaposition but in collocation with another phrase, ‘acting on behalf of another person for services rendered’.

Although ABP’s decision was rendered in the context of an ad-agency arrangement with a newspaper publisher, it becomes imperative to apply the ratio of this decision in similar arrangements in other industries/sectors on a case-to-case basis.

This decision underscores the importance of the terms and conditions of the arrangement/contractual relationship between the parties, which may prove to be a decisive factor in characterising payments.

(The authors are Associate Director and Manager, respectively, PricewaterhouseCoopers.)

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