This article discusses a recent judgment pronounced by the Hon’ble Supreme Court in the case of Director, Prasar Bharati v. Commissioner of Income Tax, Thiruvananthapuram[1]

In the facts of the case, the Supreme Court has held that payments made by Prasar Bharati Doordarshan Kendra (‘Prasar Bharati’) to advertising agencies are in the nature of commission in terms of the inclusive definition of ‘commission or brokerage’ as provided in section 194H of the Income-tax Act, 1961 (‘ITA’).  Consequently, it was held that Prasar Bharati was obligated to withhold tax on such payments made to the advertising agencies.

The Explanation to section 194H is an inclusive definition and covers any payment received or receivable, directly or indirectly by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to asset, valuable article or thing not being securities.

This judgment assumes importance since it has brought to the fore again, the age-old, widely debated issue as regards whether payments made by media to advertising agencies are in the nature of a trade discount or a commission. Firstly, it would be worthwhile to get a quick understanding of the facts in the case under consideration, the judgment of the Supreme Court and most importantly, the rationale for the judgment.

Overview of the facts of the case:

·      Prasar Bharati functions under the Ministry of Information and Broadcasting, Government of India; in the course of its business activities, it was running a TV channel called 'Doordarshan'. It was regularly telecasting advertisements of several consumer companies (amongst others). 

·      Prasar Bharati had entered into agreements with several advertising agencies in terms of which the advertising agencies were required to make an application to Prasar Bharati to get an 'accredited status'; this status would then enable them to telecast the advertisements of their clients on Doordarshan.

·      The agreement between Prasar Bharati and the advertising agency, inter-alia, provided that Prasar Bharati would pay 15 per cent by way of commission to the agency.  The agency was required to give a minimum annual business of Rs. 6 lakhs to Prasar Bharati in a financial year, failing which its accreditation could have been withdrawn.

Stand adopted by the Assessing Officer and Appellate Authorities:

·    During the course of assessment proceedings, the Assessing Officer took a view that section 194H of the ITA was applicable to the payments made by Prasar Bharati to the agency, because the payments made were in the nature of 'commission' as defined in the Explanation to section 194H. The Assessing Officer held that Prasar Bharati had defaulted in complying with TDS obligations and thus, section 201(1) of the ITA needed to be invoked.

·     On appeal, the Commissioner (Appeals) concurred with the reasoning adopted and the conclusion arrived at by the Assessing Officer and accordingly, dismissed the appeal of Prasar Bharati.  

·     On second appeal by Prasar Bharati, the Tribunal allowed the appeal. However, on further appeal by the Revenue, the High Court ruled in the Revenue’s favour.

Observations of the Supreme Court and the judgment:

On appeal by Prasar Bharati by way of a Special Leave Petition to the Supreme Court, the Supreme Court held that the High Court was right in holding that section 194H of the ITA was applicable to the subject payment made by Prasar Bharati to the agencies since it was in the nature of 'commission'.  Therefore, Prasar Bharati was under statutory obligation to deduct income tax at source.

It is relevant to note that the Supreme Court upheld the conclusion arrived at by the High Court basis the following facts on record / basis the following rationale:

·     The agreement itself had used the expression 'commission' in all relevant clauses.  There was no ambiguity in any clause and no complaint was made to this effect by Prasar Bharati. 

·     The terms of the agreement indicated that both the parties intended that the amount paid by Prasar Bharati to the agencies should be paid by way of 'commission' and it was for this reason that the parties had used the expression 'commission' in the agreement.

·      Keeping in view the tenure and the nature of the transaction, it was clear that Prasar Bharati was paying 15 per cent to the agencies by way of 'commission' itself and not under any other head. 

·   The transaction in question did not show that the relationship between Prasar Bharati and the accredited agencies was principal-to-principal, rather, it was a principal and agent one. 

·     It was clear that the payment of 15 per cent was being made by Prasar Bharati to the agencies after collecting money from them and it was in consideration for securing more advertisements (for them) / securing more business from the advertisement agencies. 

Food for thought:

As one can see, the Supreme Court arrived at this conclusion primarily basis the facts on record. The key rationale for the judgment as such is that, owing to the expression ‘commission’ used in the agreement and considering the principal-agent relationship existing between the two parties, the payment squarely fell under the purview of section 194H of the ITA.

There appears to be an industry practice of media offering a discount of 15 per cent to advertising agencies. The question that arises for consideration is whether in essence, this 15% represents a trade discount or a commission? The answer to this question would depend upon the following two key factors:

·    What the nature of relationship is (in substance) between the media and the advertising agencies. If the relationship is principal-to-principal, TDS should not be applicable, whereas, on the other hand, if it is a principal-to-agent relationship, TDS may apply.

·    What does the 15% represent in essence –is it a trade discount (a deduction from the market price of services, offered basis mutual agreement or industry practice) or is it a commission (which is paid for soliciting business or acting on the principal’s (here media’s) behalf).

In a case of a principal-agent relationship, one would appreciate that a person can be said to be an agent /intermediary (for a principal) only where there exists a principal-to-principal contractual relationship between that principal and another party. In the context of the current situation, if any advertising agency acts as an agent for the media (acts on behalf of the media), one would appreciate that logically, there then needs to be a contractual arrangement between the media and the client.

In the case in question, based on a reading of the judgment, it appears that the advertising agency had a contract with the client on a principal-to-principal basis. There is no reference to any contractual relationship between media and the client.

Section 194H clearly refers to a situation where a person is acting “on behalf” of another person.

Therefore, one wonders whether the 15% payment indeed represented a commission or was it just a case of the agreement not supporting the factual position/essence of the relationship between the media and the advertising agency? Could it be said that the form of the arrangement (receiving gross amount and paying commission) was not consistent with the substance of the arrangement? Questions galore!

Here, it may be noted that a similar issue was dealt with by the Allahabad High Court in the case of Jagran Prakashan Limited v. Dy. CIT (TDS)[2].  Here, in the absence of an agreement between the petitioner and the advertising agency and more so due to the fact that the advertisement agency was never appointed as the agent of the petitioner, the Allahabad High Court held that there is no principal-agent relationship between the two parties and accordingly, the 15% payment to the agency ought not to constitute commission in the hands of the advertisement agency. 

The Supreme Court in the case of Prasar Bharati, has distinguished the said judgement of the Allahabad High Court while pronouncing its judgement citing the differences in the facts in both the cases. 

It may also be noted that as per Circular No. 715 dated 8 August 1995 issued by the Central Board of Direct Taxes (‘CBDT’), and the subsequent clarificatory letter issued, the payment made by media companies to advertisement agencies ought not to attract any TDS since in such cases, TDS would have already been deducted by the advertiser while making payment to the advertisement agency.  However, since the Circulars issued by CBDT are binding only on the Tax Authorities and not the Tribunal / Courts of law, it would be no surprise if the Tribunal / Courts do not take cognizance of the said Circular.

Once again, here is another judgment that highlights THE crucial role that facts and also documentation of those facts play in arriving at conclusions on tax positions. In cases where facts are either not clear or not represented appropriately or where documentation is not robust enough to support the fact-pattern, even WIN-WIN situations can go down the grave. And till the time there is clarity on industry tax issues like the instant one, the litigation story will continue…