Income for putting Advertisement on your website + Section 44AD + Service Tax

[CA Neil Ganatra]

Nowadays many people are using their own website as the source of their income. The income is for allowing other brands to put advertisements on website. The brands are interested in such website because it is niche in terms of traffic.

There are few agencies (For Example, Google Sense) through which one select brands of advertisement to put on the website. In this case, agency enters into an agreement with the website owner for putting others’ advertisement on website.

The website owner is at sole discretion to allow the space for advertisements and even while selecting the brands suggested by the agency. In return the website owner receives the pay based on the number of clicks made by readers on the advertisement published his website. Putting advertisement on website is restrictive by agency and third party advertisements are not allowed unless and until routed by agency. In short, no direct advertisement is possible.

Let us understand the tax implications on such income:

Direct Tax Implications

Following questions arise for such income:

1. What is the nature of income?
a) Business Income
b) Rent for giving some space on site for advertisement or
c) Commission

2. If it is considered as business income then whether it will be considered as agency business or normal business?

3. Can provisions of Section 44AD be applied on such income?

Let’s consider all these possibilities one by one.

1. What is the nature of income?

‘Business Income’ means income from an activity /adventure in the nature of trade, commerce or manufacture. It also includes services rendered. For the purpose of any income becoming business income, that activity need not be continuous. Even single/isolated transaction can be termed as business.

It is important to note that “if there is neither control over the actual conduct of the day to day business nor there is direct nexus with the profits or losses of a business, there can be no question of a business or profession carried on by the assesse in terms of Section 28 and the case, therefore, must fall within the ambit of Section 56 as income from other sources.
[CIT v. S.K.Sahana & Sons Ltd. (1987 (5) TMI 358 - HIGH COURT OF PATNA (FB)]

As explained above in case of income generated through advertisement on website, there is no direct control over the day to day business as though the person owning it had right to decide what advertisement to be placed on site and on what place, the agency has right to change the content/remove the advertisement anytime during the contract period. Secondly there is no direct nexus between the income from such advertisement and placement of advertisement on website. The income depends not on putting the advertisement on site but on click on the advertisement by the viewer of website and not otherwise. Hence it can’t be termed as business income.

Considering that it is not business income, let us consider whether it is rent income or not.

‘Rent’ is income under lease, sub-lease, tenancy or agreement/arrangement either for the use of land or building, machinery or plant or equipment or furniture and fittings.

Here in the given case, the income is based on the click on the advertisement placed on the website and not for providing space on the website for that advertisement. In general terms rent is a fix amount for providing some space. Here there is no such fix amount for providing space on the website for advertisement. Payment is per click on Advertisement and not for space. Hence considering the definition and general idea about rent, it can’t be termed as the rent income in current case.

On the other side, ‘Commission’ is income which is received or receivable by a person acting on behalf of a person for service rendered (not professional service) in the course of buying/selling goods or any transaction relating to any asset, valuable article or thing not being securities.

Hence, income in the given case will be termed as commission paid by the agency to the website owner providing service by way of space on website for putting advertisement on it.

2. In spite of what is discussed above, if we say it a business income, will be an agency business?

In agency business, agent is bound by the various terms of the principal merchant. Some of the conditions may be like agent can’t sale items of other company, payments on the basis of sale, can’t make certain changes without the permission of the principal merchant etc.

Now if other thought of lobby considers income in this case as business income, it will be an agency business as website owner is bound by various terms one of such very important term is that

- Website Owner can’t put any advertisement from any other agency. If at the time of entering into agreement with the agency owner has put any advertisement on the website already then he has to remove that first.
- Website Owner can’t make changes in the area/slot of the website allotted to particular advertisement without written permission of the agency.
- Website Owner can’t remove the advertisement without permission of advertisement agency.
- The payment is based on clicks on advertisement subject to the fulfillment of all other conditions by the owner of the website.

These conditions make the so called business an ‘Agency business’ for displaying advertisement on behalf of that agency.

3. Whether provisions of Section 44AD will be applied?

Section 44AD is for the computation of income on estimated basis (technically termed as presumptive taxation) in case of taxpayers engaged in certain businesses.

Eligible assessees for the purpose of Aection 44AD are

- Resident Individual
- Resident HUF and
- Resident Partnership Firm (not LLP)

Eligible businesses for the purpose of this section are assessee engaged in all the businesses except mentioned below.

- Person engaged in professions specified in Section 44AA
- Person having commission or brokerage income
- Person having business of goods carriages (plying, hiring or leasing) and
- Person having agency business.

As income in the above case will either be commission income or agency business income provisions of Section 44AD won’t be applicable.

Therefore, the website owner is required to maintain regular books of account, self-assess the taxable income (without the benefit of Section 44AD) and file normal income tax return. The tax audit will be applicable if the turnover is more than Rs. 1 Crore in the previous financial year.

Indirect Tax Implications:

The activity is certainly a service within the ambit of service tax legislation. The concept is however not new for service tax legislation.

Position before July 2012

The advertising services are covered in more than one head in Service Tax:

1. Advertising Agency Service (more in nature of preparation of creating and displaying ads)
2. Sale of space or time for Advertisement Service (more in nature of displaying ads through radio, television etc.)
3. Business Auxiliary Service (Commission business for canvassing advertisements)

The website owner publishing advertisement on number of clicks is definitely interested to earn commission instead of running an advertisement agency. The nature of income is side business for him and he would like to increase the popularity of website so that more number of people visit it, see the advertisement, click on it and more earnings can be generated. Directly or indirectly soliciting of advertisement takes place and commission is earned out of such soliciting. Under service tax legislation the commission income is largely falling under Business Auxiliary Service.

What is canvassing?

Canvassing is to solicit votes, subscriptions, opinions, or the like from. Usually the word is used for political party awareness for vote earnings but here the canvassing is any other soliciting or marketing in simple sense.

The CBEC Board vide Circular No.96/7/2007-ST dated 23.08.2007 on this issue has clarified the following matter -

Point No. 004.01 / 23.08.07: Persons / agencies canvass advertisements for publishing, on commission basis.

Such persons / agencies do not provide any other services like making, preparation, display or exhibition of advertisement. Whether merely canvassing advertisement for publishing on a commission basis by persons / agencies is classifiable as Advertising Agency service [Section 65(105)(e)] or not?

Merely canvassing advertisements for publishing, on commission basis, is not classifiable under the taxable service falling under Section 65(105)(e). Such services are liable to service tax under business auxiliary service [Section 65(105)(zzb)].

Position after July 2012

New Service Tax regime has introduced Negative List and Mega Exemption List.

Are advertisements published on internet exempt?

The text of exemption is as follows:

“Selling of space or time slots for advertisements other than advertisements broadcast by radio or television.” – Entry (g) of Negative list as specified in Section 66D of Finance Act, 1994

The entry clearly mentions that the advertisements published other than by radio or television broadcast are exempt. Therefore, the advertisements published on internet are exempt.

Does it mean canvassing of advertisement is also exempt?

The canvassing of advertisements is neither in the negative list nor in the Mega Exemption List and therefore continues to be liable under Service Tax.

One shall understand that the entry (g) of Negative List is prima facie for “Selling of space or time slots for advertisements” and not applicable to canvassing of advertisements. Even in the earlier regime (i.e. before July 2012, the entry was included under “Business Auxiliary Services” because nature of income is commission and was not covered under “Selling of space or time slots for advertisements”. Therefore, considering the same perspective the canvassing of advertisement shall be taxable.

The Education Guide introduced by CBEC on 20th June 2012 for better understanding of Negative list and new regime has following to comment on this issue:

“4.7.4 Whether merely canvassing advertisement for publishing on a commission basis by persons/agencies is taxable?

Yes. These services are not covered in the negative list entry.”

New regime is not service wise but recent changes of restoration of old accounting codes suggest that the classification of services is still required to be made under respective service as far as possible. Now wherever the apparent classification of services is not possible the services shall be classified taking into consideration the old law. Therefore, commission earned on the placement of advertisement on website through advertisement agency still will be liable under Business Auxiliary Service.

Person can definitely enjoy the threshold exemption benefit of Rs. 10 lakh as granted under Notification No. 6/2005-ST dated 1-3-2005 and modified from time to time.

CA Neil Ganatra

CA Gautam Joshi