MUMBAI: Come the end of the next advertising billing cycle, an age old practice is likely to come to an end in the Indian broadcasting industry, if TV channels have their way.

Media agencies will start receiving bills net of agency commissions, rather than gross bills (with the 15 per cent agency commission deducted from the gross amount) for TV commercials and ad spots carried by television channels.

The Indian Broadcasting Foundation (IBF) has communicated this to the Advertising Agencies Association of India (AAAI). So what has forced the IBF to attempt to do away with a long standing practice of gross bills?

What happened is that quite a few broadcasters received notices from the income tax department towards end-March 2013 claiming unpaid TDS on the 15 per cent agency commissions that is mentioned in the gross bill amounts that broadcasters normally send to agencies.

"They have asked for retrospective TDS from some broadcasters over the past three years on the 15 per cent agency commission," says IBF president and Multi Screen Media (MSM) CEO Man Jit Singh. "We have not calculated the exact amount of money this would entail, but it is substantial and could cripple the industry and hence we have been advised to move to net billing."

Immediate past president of AAAI and Draftfcb Group chairman India Nagesh Alai says that "this incident cannot be used to rationalise or force any move to net billing. It will adversely impact the advertising industry and hence is not acceptable to AAAI. It‘s a well-established principle under income tax laws that the payer of monies has to deduct TDS. The clients pay the agencies after deducting the TDS and thereafter the agencies pay the media the net amount due to them. Hence, there is no obligation on the media to deduct any TDS from agencies. This is well established by a circular issued by the tax authorities in 1995, when AAAI had sought a clarification. Hence, the notices raised on the broadcasters by the tax authorities on the specious argument that broadcasters have not deducted TDS from agencies, is untenable and not maintainable under law. It has to be argued on merits."

Singh says that broadcasters are broadly in agreement with the AAAI and that they are going to go in appeal against the notices. "We are going to argue our point. But who is going to pay the 50 per cent or so of the claim amount that we will have to deposit with the tax authorities until the appeal is heard and judgment in our favour delivered? Our cash flow position is going to be hit hard."

Alai says that broadcasters "should not be panicking as a result of such wrong claims. As business partners, AAAI and IBF will be working together on this, as always. KPMG and E&Y have been roped in to address the issue on merits."

He adds that "as an aside, it‘s a matter of fact that such tax notices and claims, based on irrational disallowances, invariably emanate in February or March, driven by revenue targets of the tax department."

Singh once again says that he concurs with the AAAI stance "but our tax advisors have said there is no guarantee that even if our appeal is upheld this time, we will not be issued notices from the income tax department again. We can‘t be going in appeal again and again. Hence we are quite firm on our decision to go ahead with the net billings system from the next billing cycle."