Taxman adds to the suspense

On the tax front, March proved to be an action-packed month for the media and entertainment industry. Assessment orders passed by the Income Tax Office have started pouring in, and some of the worst fears of the industry have proved true. The tax authorities have made huge additions/ disallowances to the income of the M&E companies, once again paving way for long-winded litigation.

Broadcast companies have been at the forefront of the litigation. A major issue on which they are at loggerheads with tax authorities is the withholding tax on payment for production of TV programmes, carriage fees/ placement charges paid to multi-system operator (MSO) and cable operators, and so on. The broadcasters say such payments attract TDS (tax deducted at source) of 2 per cent, as payment for ‘work’ carried out by the recipients. However, tax authorities contend that such payments are liable for TDS of 10 per cent as the payments are for technical services/ royalty. A new controversy arises over whether tax should be withheld on the “15 per cent agency commission” reflected in the invoice raised by broadcasters on advertising agencies, with the broadcasters and tax authorities differing on it. On account of such alleged non-withholding/ short withholding of tax, the proportionate expenditure is disallowed by tax authorities, resulting in huge tax demands.

Similarly, foreign broadcasting companies are facing a tumultuous time in India, litigating on various fronts. Characterisation of subscription revenues — whether it is in the nature of business income or royalty — has been a matter of controversy. The foreign broadcasters says such revenues are business income, not subject to tax in India; but tax authorities term them as royalty subject to 10 per cent tax on a gross basis (incidentally, tax on royalty is proposed to be enhanced to 25 per cent under Finance Bill 2013). Similarly, taxability of advertising revenues remains disputed despite the broadcasters paying an arm’s length remuneration to their Indian Associated Enterprises (AEs), which act as agents for advertising sales.

Another major worry for the industry is the disallowance on account of the advertising and sales promotion expenditure incurred by the Indian AEs of foreign broadcasting companies. The taxpayers contend that such expenditure is incurred for business and, hence, ought to be allowed as a deduction; but tax authorities say that the expenditure primarily benefits the foreign broadcasting companies and they should bear it. While the Bombay High Court has ruled in favour of the taxpayers, tax authorities have challenged the decision in the Supreme Court.

The DTH industry is not far behind in litigation. The main dispute is over withholding tax on the discount given to distributors on the sale of set-top boxes (STBs)/ recharge coupon vouchers (RCVs).

Tax authorities say the discount is in the nature of commission, subject to withholding tax of 10 per cent under section 194H. But the industry disputes this — a view supported by the recent Supreme Court decision in the case of the Ahmedabad Stamp Vendors Association related to the discount on lottery ticket sales. While the industry believes that the ratio decided on should apply equally to the discount given to distributors of STBs/ RCVs, tax authorities disagree.

Similarly, there is disagreement over whether payments to foreign companies for uploading and displaying banner advertisements on their portals are liable to withholding tax in India. While the Mumbai Tribunal, in the case of Pinstorm Technologies Pvt Ltd, recently held in favour of the taxpayers, tax authorities have disputed it.

There is litigation galore on various other counts, including transfer pricing, service tax and VAT. India may well be crowned “the land of litigation”, which would surely not please the Government.

The kind of assessments India Inc witnessed this year is a far cry from the Finance Minister’s assurance of ushering in a stable and certain tax regime for investors.

The author is Partner, KPMG in India.

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