Broadcasters fear the return of gross ad-billings

NEW DELHI: Indian broadcasters fear that an Advertising Agencies Association of India (AAAI) move to request the Central Board of Direct Taxes (CBDT) to repeal Income Tax notices to broadcasters — which seems designed to help them — may actually be designed to bring back the gross ad-billings arrangement which they had managed to do away with from this month.

Broadcasters said they were very clear that the net billings arrangement (as per global practice) that was hammered out with AAAI from May 1, 2013, must continue, and that reverting to allowing gross amounts to appear on invoices would not be good governance accounting, as this amount is never transacted between broadcasters and advertising agencies.

“Broadcasters have already received severe notices, with potential to lock up significant working capital. The ambiguity of gross billing and its tax related consequences are not something the television industry can afford to risk,” says Shailesh Shah, secretary general of the Indian Broadcasting Foundation, the apex organisation of television broadcasters in the country.

Gross billing would allow the problem to persist and give authorities an opportunity to question the practice again, like they have in the past, while net billing would move the industry closer to the successfully evolving accounting principles in India, and help clean up a mess that has been going on for decades. “Our position is that net billing is effective and clean and reflects what the broadcaster finally gets,” says Manjit Singh, the chief executive officer of Sony Entertainment Television.

However, sources said that AAAI believes that net invoicing may impact agencies’ transactions with their clients. It has, therefore, suggested that the CBDT issue a clarification on TDS for a repeal of the tax notices that broadcasters have recently received, perhaps in the expectation that this would force broadcasters to revert to gross billings. Sources say that AAAI has till May 31st to appeal to CBDT for a clarification on the TDS issue.

TV channels had been asked to pay TDS on the 15% trade discount to advertising agencies on account of gross billings for amounts which they had never transacted. Broadcasters opposed this strongly on the grounds that this was nothing more than a fictional amount shown on invoices, resulting from what broadcasters say is a “long-standing deplorable practice” and have filed several appeals before Commissioner of Income Tax – Appeal against the tax demands.


Sources pointed out that the genesis of this fictional amount goes back to the time when advertising agencies performed several functions together. They strategised on the message, created ads, planned for when these would be viewed, brokered space on various media such as billboards, newspapers, radio, television and buses on behalf of advertisers — and were paid up to 15% of ad-spend as fees or compensation for their effort. Advertisers paid agencies, and in turn, agencies paid media.

Starting around 1985, globally, the ad industry went through a series of upheavals, that saw the rise of M&As leading to the formation of a few very large conglomerates. Less than ten agencies owned more than 65% of advertising in most parts of the world by the early 1990s. Consequently, to manage size, market research, creative work and media management became three distinct lines of business.

By the early 2000, creative agencies were earning up to 12% of ad-spend for their work, while media managers earned up to 3%. In order to hike revenues, media managers decided to ask media companies to continue the legacy from the old single agency days, ie, provide them with invoices that would still show the total 100 as the full billing amount.

Since agencies were paid by advertisers, the 100 would then exclude the 15 called “agency commission/discount”, and an amount of 85 was shown as net, which, with taxes, became payable by agency to media.

Industry sources said that in India as well, the 15 never got transacted between media companies and agencies. And yet, it showed up on invoices. Since there was no negative impact on media at the time, they went ahead and generated such invoices and inadvertently fostered a questionable practice.

On the basis of these invoices, agencies tried to negotiate as much of the 15% from advertisers as they could. While some advertisers understood the genesis of the practice, they paid up to 3% of ad-spend; several regional and local advertisers did not either know, or understand its implications. In such circumstances, media managers got a very large chunk of the 15% they claimed broadcasters discounted from their invoices to agencies.

The oddity in all this is, as industry veterans pointed out, media invoices to agencies continued to show the 15, first as a “commission” and subsequently as a “trade discount”. Neither commission nor discount ever got transacted, but became a basis for media buying-agencies to create a negotiating point with advertisers.

Tax authorities started to question this practice and issued notices to broadcasters to deposit a TDS for this perceived commission or discount agencies are getting. Obviously, broadcasters were appalled, since the ‘15’ was never transacted — and since they never saw the ‘15’, they did not understand why they ought to be taxed on it.