DISCOUNT AND INCENTIVE IN ADVERTISING BUSINESS - VALUATION ISSUE

[Dr. Sanjiv Agarwal]

In terms of section 67 of the Finance Act, 1994 and Service Tax (Determination of Value) Rules, 2006, service tax is payable on gross amount changed rendering of taxable service.

In case of advertising business, the charge of service tax on advertising agents would include both - service connected with the releasing of an advertisement as well as artwork charges and charges arising from the work done by the creative department of the advertising agency. The definition of 'service' for the purpose of assessing service tax includes "not only any service connected with the making, preparation of advertisements but also includes any services connected with display of advertisements".

Service tax has to be charged on gross income and not on the capitalised billings. The amount paid, excluding their own commission, by the advertising agency for space and time in getting the advertisement published in the print media or the electronic media will not be included in the value of the taxable service.

Any expenditure incurred by the advertising agency on paper and printing constitutes a component of service provided and no deduction is allowed in respect of such expenses. Agencies, at times, incur expenses connected to the job, or services rendered i.e., expenses on traveling, hotel charges, transportation etc. These expenses are charged to the client. These expenses will also be included in computing service tax as they are part of the gross amount charged to the client.

Service tax is payable not only on the cost of service of the advertising agency as represented by commission for advertisements in print media but also on commission earned from electronic media. The cost of services may include material costs and other rendering costs. Other costs should be segregated from material costs which are not taxable as materials are goods which are not subject to service tax.

In case of service provided by advertising agency, service tax is liable to be paid on the total cost of printing undertaken on behalf of advertising agency, by the printer and no exclusion on cost of paper is permissible as it constitutes a component of service provided.

In, the Euro RSCG Advertising Ltd .v. CCST, Bangalore &   Marketing Consultants & Agencies ltd. v. CCST, Bangalore [2007 -TMI - 1721 - CESTAT, BANGALORE], the  appeals have been disposed off by way of a common order and relating to valuation of taxable services in relation to advertising agency services.

The gist of the tribunal's judgment reveals that -

The clients of the advertising agency are those on whose behalf, agency works or to whom agency provides services in relation to advertisements.

Media is not the client of advertisement agency

Amounts received by service provider from client only are liable to service tax and not the amount received from others.

Media only gave discount to the advertising agency and advertising agency did not receive any amount from media. It is the agency who pays to media for the advertisements.

Advertising agencies are not liable to service tax on discount on bills, cash discount or advance payment and target incentives received from media.

Target incentive is in no way connected to service rendered to clients nor it is billed to clients. Moreover, clients did not paid (media paid) these amounts to the advertising agency.

In these two appeals, the appellants provide advertising services to their various clients. In order to provide the above services, they in turn, get in touch with media for booking of time slot on various satellite channels to their clients. As per industry practice, the broadcasting agency provides 1596 discount from their tariff rate to the appellants. The appellants provide advertising services to two categories of the client. The first category is fee based clients and the second one is non-fee-based client. In the case of fee-based clients, the appellants charged the clients a fixed fee per month irrespective of whether any advertisement is broadcast or not. In respect of these clients, the appellants provide advertising service by engaging print media, TV channels and charge the clients without any mark up and pass on the discount given to them by the broadcasting agency.

Taxable service means any service provided or to be provided to a client, by an advertising agency in relation to advertisement in any manner [Section 65(105)(e)].

Therefore, such a person/organization who wants to avail the services of advertising agency becomes the client of the advertising agency. The advertisement can be done in various ways either through Print Media or through Radio or Television, etc. In order to fulfill the requirements of his client the advertising agency which is the service provider gets in touch with the appropriate media. In other words as far as the advertising agency is concerned, its client is not the media. In order to provide advertising services the advertising agency charges certain amounts from the clients. Such amounts are liable to service tax. Service tax is payable (section 67) on the gross amount charged to the client for the service rendered to him.

In case of advertising, advertising agency gets commission or discount from media. On a bill of Rs. 100, advertising agency remits the net amount after deducting the discount allowed by the media. The service tax component received from the agency is remitted to the revenue department by the media agency. Infact, agency did not received any amount from media but only got a discount.

The Tribunal held that in any case, .any amount received by the service provider from his client only is liable to service tax and not amounts received from others. Since there is no service tax liability, there is no question of imposing penalty and demanding interest. Hence, we set aside the same and allow the appeal with consequential relief.

Similarly, in second case, where service tax was demanded on the amounts received as cash discount and target incentives received from media (not the clients), it was held that since these amounts have not been received from the clients of the service provider, there is no liability of service tax on these amounts.

Some of the publications request for their payments before the advertisements are released and have agreed discount on these advance payments. These discounts on the bills are received from the publications and not from the clients. Thus, cash discount is an income from payment of bills in advance and not from services rendered to clients and does not attract service tax. In addition to this cash discount, the appellants received incentives from certain publications after they reached certain targets of advertising business given to them. This incentive is called target incentive. It is in no way connected to the service rendered to the clients nor is billed to the clients.

In view of this judgment, it is clear that for levy of service tax both are important- rendering of service and receipt of consideration from service receives against such service.