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Advertising agencies were among the first services to be targeted when the service tax was introduced in 1994. After initial hiccups, such as questioning the constitutional validity of the levy, this service turned out to be a cash cow for the government.
The levy was believed to be restricted to advertisement agencies which did all the hard work of making out a draft of an advertisement, artwork and design to enable an advertisement to come out in the media. In a sense, a physical activity had to be involved to attract the tax.
Judicial decisions, like the one in Commissioner versus Team UPD Ltd 2005 (179) ELT 469, where it was held that mere selling of space could not be tantamount to providing a service only reinforced the above thinking.
Circular No F.No.341/43/2005-TRU, however, changed this. It ruled that the service of obtaining space and time in getting an advertisement published in any sort of media will be a taxable service. It was argued that the services provided by the media is actually received by the advertising agency and used as an input service for providing the taxable service to the client.
An advertising agency negotiates 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 the contractual obligations exist only between the said two parties.
The advertising 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. An advertising agency is not acting as an agent of the client in such transactions.
The service provided by the advertising 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 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 advertising agency does not necessarily receive the exact amount paid or payable to the media from the client.
In other words, an advertising agency does not act as an agent of the customer when he 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 this circular appeared to concentrate on advertisement space in the print and electronic media, the online media thought that they too could come under the levy. Google sought an opinion from the Authority for Advance Rulings on 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 saying that the company should be classified as an advertising agency.
This decision is bound to alter the finances of many an advertising agency. The lack of a comprehensive definition of service leaves the definition in the hands of the Cestat or the courts. The next Budget should attempt to ease the pain for service providers by spelling out taxable and non-taxable services in a clear-cut manner.
