[aaykarbhavan] Sum paid by one advertising agency to another akin to payment to a sub-contractor; sec. 194C attracted

 IT: Payment made by one advertising agency to other advertising agency for getting work done would be subjected to TDS under section 194C

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[2013] 38 taxmann.com 330 (Chandigarh - Trib.)

IN THE ITAT CHANDIGARH BENCH 'B'

Aakash Tah

v.

ACIT, Circle-3(1)*

T.R. SOOD, ACCOUNTANT MEMBER 
AND MS.SUSHMA CHOWLA, JUDICIAL MEMBER

IT APPEAL NO. 1025 (CHD.) OF 2010
[ASSESSMENT YEAR 2006-07]

AUGUST  26, 2013 

I. Section 194C, read with section 40(a)(ia), of the Income-tax Act, 1961 - Deduction of tax at source - Contractors/sub-contractors, payments to [Advertising contract] - Assessment year 2006-07 - Assessee was engaged in business of advertising services and had shown purchase of advertising service from other agency 'RAS' without deduction of tax at source - Assessee's case was that RAS was not advertising agency but a media buying agency and media purchases were exempt from TDS - Facts revealed that RAS was not part of media but it booked advertisement further with other media group and, thus, it was a case of one advertising agency getting work done by other agency - Assessee did not produce any evidence to show that accredited agent, i.e., RAS, had not provided any advertisement services to it - Whether payment made by assessee to RAS was to be treated as payment made by contractor to sub-contractor and assessee was liable to deduct TDS from such payments - Held, yes [Paras 11 & 13][In favour of revenue]

II. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Staff welfare expenses] - Assessment year 2006-07 - Assessing Officer disallowed 20 per cent of staff refreshment, travelling and conveyance expenses incurred by assessee on ground of personal usage - Whether since disallowance had been made on ad hoc basis and no detail had been filed by assessee to examine whether any personal expenditure could be said to have been incurred, disallowance was to be restricted to Rs. 5,000 - Held, yes [Para 17] [In favour of assessee]

Circulars and Notifications : Circular No. 715, dated 8-8-1995

FACTS - I

 

■		The assessee was engaged in business of advertising services. It had shown purchase from other advertising agency, namely, RAS without deduction of any tax at source.
■		On query raised, the assessee contended that RAS was not advertising agency but media buying agency and as per Circular No. 715, dated 8-8-1995, print/electronic purchase were exempt from TDS.
■		The Assessing Officer observed that in fact the amount shown as media purchases was basically advertisement works sub-contract and assessee was liable to deduct tax under section 194C(2).
■		The Commissioner (Appeals) dismissed appeal of the assessee.
■		On second appeal:

HELD - I

 

■		The section 194C(2) clearly shows that provisions of tax deduction are applicable on the work of advertisement because the same is included under expression 'work' by Explanation (3) which defines 'work'. Further, the provisions make it clear that whenever a person being main contractor gets some work done from the sub-contractor, even then the provisions of tax deduction would be applicable. [Para 10]
■		In the instant case, the assessee had shown purchases of advertising services from RAS without any deduction of tax. The assessee has booked advertisements for various clients. It was vehemently argued that since assessee was not an accredited agent, the advertisement was routed through RAS. It was explained that accredited agency receives credit for a period of 60 days, that is, why advertisement was routed through an accredited agency, i.e., RAS and no advertisement work was done by RAS. However, there is no evidence on record to show that no advertising work was done by RAS. Otherwise also, it transpires during the hearing that RAS is owned by assessee's son and, therefore, assessee should have been more careful to route the advertisement work through his son and obtain proper bills. The Assessing Officer has categorically given a finding that amount was debited as purchases from RAS. Alternatively, it is the services which can be purchased. [Para 11]
■		The careful reading of Circular No. 715, dated 8-8-1995 would clearly show that provisions of TDS would apply when a client makes payment to an advertisement agency. It has also been clarified that when an advertisement agency makes payment to the media which include both, print and electronic media, then provisions of tax deduction are not applicable. Admittedly, RAS is not part of media. In fact, RAS has booked advertisements further with other media group. So, it becomes a case of one advertising agency getting work done from the other advertising agency, i.e., a sub-contractor. It is possible that when an advertisement is booked, some part of the work is done by one agency and some part is done by another agency. In the absence of any evidence to show that RAS has not provided any services, the only conclusion possible is that such agency had provided some services. Therefore, the provisions of section 194C(2) are clearly applicable. [Para 13]

CASE REVIEW

 

Sands Advertising Communications (P.) Ltd. v. Dy. CIT (TDS) [2010] 37 SOT 179 (Bang.) (para 15) distinguished.

CASES REFERRED TO

 

Sands Advertising Communications (P.) Ltd. v. Dy. CIT (TDS) [2010] 37 SOT 179 (Bang.) (para 7).

Ashwani Kumar for the Appellant. Akhilesh Gupta for the Respondent.

ORDER

 

T.R. Sood, Accountant Member - The appeal by the assessee is directed against the order passed by the CIT(A), Chandigarh dated 07.05.2010.

2. In this appeal, assessee has raised the following grounds:—

"1.		That order u/s 250(6) passed by Ld. Commissioner of Income Tax (Appeals), Chandigarh is against law and facts on the file in as much as she was not justified to uphold the action of the Ld. Assessing Officer in disallowing a sum of Rs. 49,36,160/- by resort to provisions of section 40 a(ia).
		That she was further not justified to uphold disallowance of Rs. 12,774/- out of staff refreshment and travelling & conveyance."

3. Ground No.1 : After hearing both the parties, we find that during assessment proceedings the Assessing Officer noticed that assessee is an individual engaged in the business of advertising services in the name and style of Rave Advertising & Marketing and during the year the gross sales were Rs. 56,65,131/-. It was further noticed that assessee has shown an amount of Rs. 49,36,182.81 as purchases from Ram Advertising Service. The assessee was asked to show the details of tax deducted at source in respect of these payments and in response to which it was stated that no tax has been deducted. Thereafter, the Assessing Officer asked a further query that why such payment should not be disallowed u/s 40(a)(ia) of the Act. The assessees vide its reply dated 5.11.2008 stated as under:—

"Since print/electronic media purchases are exempt form TDS in accordance with circular No. 715 dated 8.8.1995, no amount of TDS was deducted." Assessee further submitted, "it is pertinent to mention here that Ram Advertising Service in our case is not working as an advertising agency for us rather they are working as Media Buying Agency (AOR) for us and as per the Rules of Advertising Agencies Association of India, they are responsible for raising media bills on us and collection of media dues from us and for payment to media."

4. The Assessing Officer was not satisfied with this explanation and observed that in fact the amount shown as media purchases is basically advertisement works subcontract and assessee was liable to tax u/s 194C(2) of the Act. It was also stated before the Assessing Officer that in view of the Circular No. 715 of the Board dated 8.8.1995, the tax is not required to be deducted on electronic media purchases. In this respect the Assessing Officer observed as under:—

"As regards assessee taking shelter of circular No. 715 dated 08.08.1995, the contention of the assessee is not acceptable. This circular clearly states, "TDS would apply when a client makes payment to an advertisement agency (the same(TDS) has already been applied by the clients in this case) and not when the advertising agency makes payment to the media, which includes both print & electronic media. However, TDS would apply when client payments are made directly to the media." This circular nowhere gives exemption from application of TDS provisions u/s 194 C(2) when the payments are made by contractor to the subcontractor as shown by the following llustration:

As per Circular 715, Provisions of TDS would apply between (A) and (B) and accordingly has properly been applied by the clients while making the payments for advertising. Further, Provisions of TDS would not apply between (C) & (D) and accordingly (C) i.e. Ram Advertising Service has not applied these provisions while making payments for advertising to (D) i.e. print / electronic media. However, in the case under consideration contractor (B) i.e. Rave Advertising & Marketing has failed to deduct tax at source u/s 194C(2) while making payments for advertising to subcontractor (C) i.e. Ram Advertising Service. Assessee has further contended that for him Ram Advertising Service is working as Media Buying Agency (AOR) as per rules of Advertising Agencies Association of India, therefore section 194 C is not applicable as per Circular No. 715. Assessee's contention is not acceptable as assessee has nothing on record to prove that Ram Advertising Service is a Media Buying Agency for him and even if it is assumed to be true then Circular No. 715 nowhere mentions that Media Buying Agency (AOR) to be treated at par with media as far as applicability of provisions of TDS u/s 194 C is concerned."

5. Another argument was taken that the provisions of section 194C are not applicable because the assessee's turn over does not exceed Rs. 40 lakhs was rejected because according to Assessing Officer the gross receipts were more than Rs. 40 lakhs. We are not dealing with this issue in details because this argument was not pressed before us.

6. Aggrieved by this order, the assessee filed an appeal before the CIT(A). It was mainly stated that receipts of Rave Advertising & Marketing which is proprietary concern showing receipts in the shape of commission were Rs. 7,45,732/-, therefore, because of the provisions of sub-section (2) of section 194C, assessee was not covered by the provisions of section 44AB and, therefore, the provision regarding deduction of tax was not applicable. The Ld. CIT(A) did not accept this contention and dismissed the appeal of the assessee.

7. Before us, the Ld. Counsel for the assessee submitted that assessee was in the business of advertising and marketing and was collecting assignments from various clients which were processed by the assessee and then issued / booked to the print or the electronic media. However, the assessee was not accredited agent. An accredited agent is allowed a credit facility for sixty days. He submitted that assessee made payment through the accredited agency i.e. Ram Advertising Agency which was owned by assessee's son. Since Ram Advertising Agency services was an accredited agency, the assessee was routing or booking advertisements through this agency. He contended that as per Circular No. 715 there was no requirement for deduction of tax once such advertisement was routed through such agency. He also referred to the decision of the ITAT Bangalore Bench 'A' in Sands Advertising Communications (P.) Ltd. v. Dy. CIT (TDS) [2010] 37 SOT 179 wherein in the similar circumstances, the tax was also not deductible.

8. On the other hand, Ld. DR strongly supported the order of the CIT(A).

9. We have considered the rival submissions carefully and are unable to agree with the submissions of Ld. Counsel for the assessee. The Assessing Officer has sought to apply section 194C (2) which reads as under:—

'Payments to contractors and sub-contractors.—

194C. (2) Any person (being a contractor and not being an individual or a Hindu undivided family) responsible for paying any sum to any resident (hereafter in this section referred to as the sub-contractor) in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labour for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor has undertaken to supply shall, at the time of credit of such sum to the account of the sub-contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income-tax on income comprised therein:

Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the sub-contractor, shall be liable to deduct income-tax under this sub-section.

Explanation I.—For the purposes of sub-section (2), the expression "contractor" shall also include a contractor who is carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the Government of a foreign State or a foreign enterprise or any association or body established outside India.

Explanation II.—For the purposes of this section, where any sum referred to in sub-section (1) or sub-section (2) is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

Explanation III.—For the purposes of this section, the expression "work" shall also include—

(a)		advertising;
(b)		broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
(c)		carriage of goods and passengers by any mode of transport other than by railways;
(d)		catering.'

10. The above clearly shows that provisions of tax deductions are applicable on the work of advertisement because the same is included under expression 'work' by Explanation (3) which defines 'work'. Further, the provisions make it clear that whenever a person being main contractor gets some work done from the sub-contractor even then the provision for tax deduction would be applicable.

11. Now in case before us, assessee had shown purchases of advertising services amounting to Rs. 49,36,160.81 from M/s Ram Advertising Service without any deduction of tax. The assessee has booked advertisements for various clients. It was vehemently argued that since assessee was not an accredited agent, therefore, the advertisement was routed through M/s Ram Advertising Service. It was explained that accredited agency receives credit for a period of 60 days i.e. why advertisement was routed through an accredited agency i.e. M/s Ram Advertising Service and no advertisement work was done by M/s Ram Advertising Service. However, to a pointed query, the Ld. counsel admitted that copies of bills from Ram Advertising Service are not available in the paper book and were not even produced before the Assessing Officer. Therefore, there is no evidence on record to show that no advertising work was done by M/s Ram Advertising Service. Otherwise also, it transpires during the hearing that M/s Ram Advertising Service is owned by assessee's son and therefore, assessee should have been more careful to route the advertisement work through his son and obtain proper bills. The Assessing Officer has categorically given a finding that amount was debited as purchases from M/s Ram Advertising Service. Alternatively it is the services which can be purchased.

12. The Ld. Counsel had heavily relied on the Circular No. 715 dated 8.8.1995. Through this circular, Board has given clarifications to the various representations made by various business groups in the form of question and answers. The answer to Question No.1 reads as under:—

"Question 1: What would be the scope of an advertising contract for the purpose of section 194C of the Act ?

Answer: The term 'advertising' has not been defined in the Act. During the course of the consideration of the Finance Bill, 1995, the Finance Minister clarified on the Floor of the House that the amended provisions of tax deduction at source would apply when a client makes payment to an advertising agency and not when advertising agency makes payment to the media, which includes both print and electronic media. The deduction is required to be made at the rate of 1 per cent. It was further clarified that when an advertising agency makes payments to their models, artists, photographers, etc., the tax shall be deducted at the rate of 5 per cent as applicable to fees for professional and technical services under section 194J of the Act."

13. The careful reading of the same would clearly show that provisions of TDS would apply when a client makes payment to an advertisement agency. It has also been clarified that when an advertisement agency makes payment to the media which include both Print and Electronic media then provisions of tax deductions are not applicable. Admittedly M/s Ram Advertising Service is not part of media. In fact M/s Ram Advertising Service has booked advertisements further with other media group. So, it becomes a case of one advertising agency getting work done from the other advertising agency i.e. a sub-contractor. It is possible that when an advertisement is booked, some part of the work is done by one agency and some part is done by another agency. In the absence of any evidence to show that M/s Ram Advertising Services has not provided any services, the only conclusion possible is that such agency had provided some services, therefore, the provisions of section 194C(2) are clearly applicable.

14. The Ld. Counsel had placed a very strong reliance in the case of Sands Advertising Communications (P) Ltd. (supra). In that case at para 8.1.3 it is observed as under:—

"8.1.3 The argument of the assessee was that the spadework with regard to advertisements such as sketch, material, getting approval of the clients of "advertisement substance devised and designed" were being precisely done by the assessee and that the finished materials (the contents of advertisements) were routed through Trishul to the media to avail accredited facility being enjoyed by Trishul. In fact, Trishul role was confined only to forward the advertisement materials devised by the assessee to the media. To put it in a nutshell, the assessee had made use of Trishul only for routing through its advertisements to the media. The collection of payments from the clients (the advertiser) was the job of the assessee. While making the payment to the assessee being the advertisement charges, the client (the advertiser) shall effect the TDS. Thus, the advertisement charges have since been suffered TDS when the clients made payments to the assessee. Trishul had indeed acted as a liaison between the assessee and the media for which it had retained 3 per cent discount extended by the media because it was accredited advertising agency."

15. The above makes it clear that in that case of the spade Work was done by the assessee himself and the finished product was routed through M/s Trishul. Further, in that case M/s Trishul was an AAA accredited agency. In the case before us there is no evidence to show that assessee is not an accredited agency and only M/s Ram Advertising Service is the accredited agency. There is not an iota of evidence to show that assessee has done all the spade work and M/s Ram Advertising Service has not done anything. In the absence of such evidence the decision in the case of Sands Advertising Communications (P.) Ltd. (supra) would not be applicable in these circumstances. We find nothing wrong with the order of Ld. CIT(A) and confirm the same.

16. Ground No.2: During the assessment proceedings, the Assessing Officer disallowed 20% of the staff refreshment and travelling & conveyance expenses by observing that element of personal usage cannot be ruled out. On appeal, disallowance was confirmed by the CIT(A).

17. Before us, Ld. Counsel for the assessee relied on the ground of appeal and on the other hand, the Ld. DR supported the order of CIT(A). After considering the rival submissions, we find that disallowance seems to have been made on ad hoc basis. At the same time, no details have been filed by the assessee before us to examine whether any personal expenditure can be said to have been incurred. Therefore, in the totality of the circumstances, we set aside the order of Ld. CIT(A) and restrict the disallowance to Rs. 5000/-

18. In the result, appeal is partly allowed.

VARSH

Regards

Prarthana Jalan

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