From now on, advertising companies need to pay tax only when they actually receive commission from the client, and not when the advertisement is telecast, a landmark judgement by the Income-tax Appellate Tribunal, Mumbai has said. The order follows an appeal filed by a Star group company Star India.
This verdict by the ITAT (D Bench) will be applicable to corporates in general. In many cases there is a time gap between raising the bill and actual receipt of payment.
The question dealt by ITAT is this: Whether tax becomes payable when the advertisement canvassed by the ad/marketing firm is telecast or when the ad/marketing firm actually receives its contractual commission, which is 15% of the advertising amount.
This question is critical because usually there is a time gap between the telecast of the advertisement and payment made by the client, which may extend to three months or even more.
Such a time gap can have serious tax implication as tax payable in the current fiscal can be deferred to the subsequent year, and consequently a return that would have shown profit could end up recording a loss.
However, the argument by the income-tax department was that the telecasting of the advertisement vests a legal right to the ad company to claim the amount from the client and that it is justifiable to conclude that accrual of income took place at this point and hence tax is payable from this point of time.
But in this case, ITAT decided that tax becomes payable only when Star India receives the respective advertisement fees. Under the contract between the company and its principal, it is entitled to the commission only when the advertising fee is actually collected from the client.
In this case, Star India is duty-bound to collect and remit the amount to its principal and its claim to its commission of 15% is subject to fulfilling this task.
The appeal was filed by Star India (formerly News Television India), Mumbai, a company functioning as a marketing and advertising agent in India for the Satellite Television Asian Region, and also engaged in producing/procuring programmes to Star and acting as a licensee in India to Star Movies pay channel.
Star India is entitled to a commission under a 1994 contract with Star Advertising Sales of Netherlands, which has the exclusive right in India for television advertisements on various channels. The assessment year under consideration was 1997-1998, 1998-1999 and 1999-00.
In the years prior to this period, the company considered the accrual of commission income on the dates when the advertisements were telecast and hence commission income was offered for taxation. The company gradually realised that income did not accrue to it on the date of telecast of advertisements booked, but accrued when payment was actually received from clients.
Accordingly, in the years under consideration, the assessee returned income on the basis of actual accrual- when realised from the clients and
to this extent method of computation was changed.
On account of the change in accounting policy, commission income for the year ended on March 31, 1997 would be lesser by over Rs 8 crore. The company disclosed loss instead of a net profit of Rs 52 lakh had the earlier system been followed.
The reasoning for accepting the claim by the company is that the assessee becomes entitled to the 15% commission only when the company collects the amount from the client and remits it to the principal. Receipt of the amount was a condition for accrual of income to the company.