Taxability of Discounts/incentives

Preliminary

It
is widely known that, post introduction of negative List based taxation of
Services, the ambit of taxation of services has expanded manifold. the  scope of ‘service’ and in particular as to
what constitutes “activity carried out for a consideration” and scope of
“declared services”, has been a subject of extensive deliberations. In this
write up, an attempt is made to discuss this aspect, with a recent ruling of
authority for advance ruling (Central excise, Customs & Service tax) [AAR
(CEST)]

Relevant statutory Provisions

Section
65B  (44) of the Finance act,   1994
as amended (Act):

“Service”
means any activity carried out by a person for another for consideration, and
includes a declared service, but shall not include: –

(a)
An activity which constitutes merely, –

i)   A transfer 
of  title  in 
goods  or  immovable property, by way of sale, gift or
in any other manner; or

ii)  Such transfer, delivery or supply of any
goods which is deemed to be a sale within the meaning of clause (29A) of
article 366 of the Constitution; or

iii)
A transaction in money or actionable claim;

(b)
A provision  of  service 
by  an  employee 
to  the employer in the course of
or in relation to his employment;

(c)
Fees taken in any Court or tribunal 
established under any law for the time being in force.

 Section 66E of the
act – Declared Services:

The
following shall constitute declared services, namely –

(e)
Agreeing to the obligation to refrain from an act, or to tolerate an act or a
situation, or to do an act.

Ruling of AAR (CEST) in AKQA media India (P) ltd. (2016) 55
GST 720 (AAR  – New Delhi) (2016) 69
taxman.com. 390:

Facts in Brief

In
this case, applicant intended to carry out the activity of an advertising
agency (‘AA’), whereby it would provide professional services to its clients
(i.e. advertisers) in relation to placement of advertisements on various media.
Further, the applicant intended to charge commission from such clients as a
consideration for provision  of its
services. While the applicant is to provide services only to advertisers,
depending on the quantum of its advertisements placed by the applicant on
various media, the applicant could be entitled to an incentive / volume
discount from the media owners (MO). The applicants propose to undertake two
business models, which are described hereafter briefly:

Proposed business model 1
– Placement of advertisement in traditional media on behalf of the advertiser
(Steps involved) [“BM 1”]:

Client
Contract

Preparation
of media Plan

Approval
of the media Plan

Issuance
of estimate by advertising agency

Issuance
of release order by advertising agency

Monitoring
of Campaign

Receipt
of invoice from media vendor

Raising
of invoice by advertising agency

Receipt
of volume discount

Proposed business model 2
– Buying and Selling of advertisement Inventory in non – traditional media, on
its own account (steps involved) [“BM 2”]

More
or less on similar lines as BM 1

under
proposed BM 1, while the applicant shall be appointed by its clients (i.e. the
advertiser) to provide services, will incidental receipt of incentives / volume
discounts from MO shall be considered to be providing a service, as defined
under the Act, to the MO and shall the same be liable to Service tax ?

under  proposed 
BM 2,  while  the 
applicant  shall  buy and sell the media inventory on its own
account to the advertiser, will incidental receipt of incentives / volume
discounts from MO shall be considered to be providing a services as defined
under the Act, to the MO and shall the same be liable to service tax?

In
case, it is considered that the applicant is providing any service to the MO,
in the course of providing advertisement placement services to its client, then
on what value should the Service tax be applicable under the Act?

Submissions of Applicants

The
incidental receipt of incentives / volume discounts by the applicant from MO are
gratuitous payment not for providing services. No service tax is payable on
such incentives in as much as the applicant does not enter into any contract
for provision of service with the MO;

The
applicant places the order on behalf of the advertiser and the advertiser is
liable to pay the cost of the advertisement to the MO and the agency commission
to the applicant. The applicant pays service tax on the said agency commission;

No
‘service’ is provided or agreed to be provided by the applicant to the MO and
that the incentives / volume discounts are paid at the sole discretion of the MO
and there is no obligation, either contractual or otherwise, on the MO to pay
incentives / volume discounts to the applicant;

The
concerned issue has been examined by the CEST at in the case of Grey Worldwide
India (P.) Ltd. vs. CST [2015] 52 GST 1020 / (Mum. – CESTAT) wherein it was
held that no service tax is payable on such amount (i.e. incentives / volume
discounts) received by the AA  from the
MO;

In
any event, once MO discharges service tax on the gross amount charged by them
to the advertisers and the applicant having discharged service tax on such
agency  commission  received, 
no  further  service 
tax is  payable  as 
consideration  for  services 
charged  by the MO  and the applicant has already suffered service
tax in full;

In
regard to the proposed BM 2, the applicant would be paying service tax on the
gross amount charged to the advertiser for the media inventory (except non –
taxable media such as print media) and the MO would charge the applicant
service tax on the gross amount charged to the applicant. any incentives /
volume discount received by the applicant from the MO post issuance of the
taxable invoice on the applicant for the gross amount charged to the applicant,
no service tax will be payable on the gross amount charged to the applicant on
the said incentive volume discount, as the service tax, at the first instance
will be paid on the gross amount charged to the applicant. The applicant, in
turn, will pay service tax on the gross amount charged by the applicant to the
advertiser.

Submissions of Revenue

As
far as proposed BM 1 is concerned, the volume discount received by the
applicant for the services provided to the MO is liable to service tax in as
much as the invoices from MO only mentions the name of the applicant, thus
there is contractual relationship for provision of service between the
applicant and mo. the  entire amount
payable to MO in respect of media is to be paid by the applicant and the
applicant is to receive separate amount as consideration for the services
provided to the advertiser.

As
far as BM 2 is concerned, applicant is to sell media inventory on his own
account to the advertiser and in such a case, applicant needs to discharge
service tax liability on the total sale price invoiced to the advertiser. In
this BM 2 also, applicant is required to pay service tax on the amount received
from the MO treating the said amount as consideration for the services
provided.

Observations of AAR (CEST)

As
far as BM 1 is concerned, it is contended by the revenue that, the amount
received by the applicant from the MO is in the nature of consideration
received for the services provided and liable to service tax for following
reasons:

(i)
Invoices pertaining to transaction from MO only mention the name of the
applicant. Consequently, contractual relationship for provision of service
exists only between these two parties.

(ii)
Entire amount payable to MO in respect of space and time for media is payable
by the applicant.

(iii)
Applicant     receives     separate     amount    
as consideration for the service provided to the advertiser.

It  is 
noticed  that  “Step 
7  (receipt  of 
invoice  from media vendor”) of BM
1, clearly mentions that the MO raises its invoices for the cost of the media
inventory sold to the advertiser. Further, invoice will mention the name of
advertiser and also the name of the applicant, besides other details,
therefore,  it is evident that the media
inventory is sold to the advertiser and not to the applicant. Also, Revenue is incorrect in stating that
invoice will only mention the name of the applicant. The submission of
revenue that the entire amount is payable to MO in respect of space and time
for media by the applicant is also incorrect. In Step 7 of BM 1, it has been
made amply clear that AA makes the payment for the media inventory to the mo,
on behalf of the advertiser after retaining its commission. It is further alleged
by the revenue that applicant receives separate amount as consideration for the
services provided to the advertiser. Step 8 of BM 1 mentions that the amount
received by the applicant from the advertiser is its fees / agency commission
plus service tax. It is to be observed
that the question raised by Revenue relating to BM 1 is based on incorrect
appreciation of facts.

In
respect of BM 2, it is contended by the revenue that the applicant sells media
inventory on his own account to the advertiser. In such case, applicant needs
to discharge service tax liability on the total sale price invoiced to the
advertiser. Applicant has confirmed that they would be paying service tax (if
any) on the gross amount charged to the advertiser for the media inventory (except
non – taxable media such as print media). Based on the above assumptions which
are factually incorrect, revenue has concluded that applicant is required to
pay service tax on the amount received from MO treating said amount as
consideration for services provided. The
question raised by the Revenue are based on incorrect appreciation of facts,
the subject question does not survive.

Revenue
further contended that as per section 65B of the act, ‘service’ has following
ingredients;

–
any activity

–
by one person for another

–
for consideration

And
in the present case, all 3 ingredients are satisfied, thus service provided to MO
by the applicant will be liable to service tax. Applicant submitted that they
will not carry out any activity for consideration. It is to be observed that in
the definition of ‘service’, there has to be nexus between activity and
consideration. In case, there is no nexus between the activity and
consideration, such an activity  shall  not 
fall  under  the 
definition  of  “service”, as the concept “activity for
consideration” involves an element of contractual relationship. This
relationship could be express or implied, for which the burden of proof would
be on the revenue. In the subject case,
no iota of the evidence has been produced before us by the Revenue to indicate
that there is an activity undertaken by the applicant, which resulted in MO giving
volume discount to the applicant, especially when  the 
choice  of  selecting 
MO   is  reportedly with the advertiser and not with
the aa (applicant). Therefore, volume discount that could be received from the MO
by the applicant is not in relation to any activity undertaken by the
applicant. Therefore, it is not service.

Revenue
also argued that the applicant provides “declared   service”  
in   terms   of  
section   66E(e)   of the act,

It
is observed that there is no agreement or contractual obligation between the
applicant and the MO to give volume discount to the applicant by the mo. volume
discount is not fixed and is to be given at the discretion of mo. Further,
volume discount is gratuitous. Applicant /AA cannot claim it as a matter of
right. Therefore, applicant is not providing declared services to the MO.

Revenue
has raised another issue that applicant provides promotion or marketing
services to the MO by giving preferential treatment to the them, which provide
volume discounts / incentives. It is noticed that MO are not under any legal
obligation to pay volume discounts and it is purely discretionary on the part
of mo.  Applicant is not carrying out any
activity to promote any mo’s  business.
Further, which MO is to be engaged is the decision of the advertiser and not of
the applicant. Therefore,  applicant
cannot be said to provide promotion or marketing services to MO.

Further,
in Grey Worldwide India (P.) Ltd. vs. CST [Order No. A /1337 – 1338 /
14/CSTB/C-1, dated 30-7-2014], tribunal 
held  that  media 
giving  certain  incentives 
by way of volume discounts cannot be levied to service tax. Relevant extracts
from the Judgment are reproduced hereafter:

“Thereafter,  at the end of the year, depending upon the
volume of business given by the advertising agency, the media gives certain
incentives by way of volume discounts / rate difference. There is no agreement
or understanding or any contract between the advertising agency and the media
for promotion of the media’s business activities. There is also no obligation
on the part of the media to Give these incentives.

These payments are made only as a gratuitous payment   for  
the   advertisements   placed  
on the media. There is no contractual obligation between the advertising
agency and the media for provision of any services. In the absence of such a
contractual obligation, it is difficult to accept the Revenue’s contention that
on the incentives received, the appellant is liable to service tax under
“business  auxiliary  Services”. This was the view taken by this
Tribunal consistently in a series of decisions starting from Euro RSCG
advertising Ltd.”

Ruling:

In
view of the above, AAR (CEST) ruled as under:

In
proposed BM 1, while the applicant shall be appointed by its clients i.e. the
advertiser to provide services, incidental receipt of incentives / volume
discounts from MO shall not be considered to be providing a service, as defined
under the Finance Act, 1994, to the MO and shall not be liable to service tax.

In
proposed BM 2, while the applicant shall buy and sell the media inventory on
its own account to the advertiser, incidental receipt of incentives / volume
discounts from MO shall not be considered to be providing a service, as defined
under the Act, to the MO and shall not be liable to Service tax.

In
view of rulings 1 and 2 above, Question 3 becomes infructuous

Conclusion:

Despite
categorical ruling by AAR (CEST) based on examination of facts placed before
them, it is a common knowledge that at a practical level advertising agencies
are authorized by media owners. Hence, they could be regarded implied agents of
media owners who book advertisements on their behalf.

Further, acting as an agent itself, may
constitute activity for consideration inasmuch as the same could tantamount to
providing representational services. In light of the foregoing, it is felt that
conclusion arrived at by AAR (CEST) may have to be tested before a Court of
law.