Supreme Court Upholds Tax Deduction on Commission Payments to Advertising Agencies: Prasar Bharati vs. Commissioner of Income Tax (2018)

Date of the Judgment: April 03, 2018
Citation: (2018) INSC 258
Judges: R.K. Agrawal, J. and Abhay Manohar Sapre, J.

Can payments made by a television channel to advertising agencies be considered as “commission,” thus requiring tax deduction at source? The Supreme Court of India addressed this question in a case involving Prasar Bharati, the operator of Doordarshan, and the Income Tax Department. The court examined whether the 15% payment made by Prasar Bharati to advertising agencies for securing advertisements was a commission, thereby attracting the provisions of Section 194H of the Income Tax Act, 1961. This judgment clarifies the scope of “commission” under the Income Tax Act, particularly in the context of advertising services.

Case Background

Prasar Bharati Doordarshan Kendra, functioning under the Ministry of Information and Broadcasting, Government of India, regularly telecasts advertisements from various consumer companies. To streamline advertising practices, Prasar Bharati entered into agreements with several advertising agencies. These agreements required agencies to obtain “accredited status” to do business with Doordarshan, allowing them to telecast advertisements on the channel.

The agreement stipulated that Prasar Bharati would pay a 15% commission to the agencies. The agencies were to retain this commission and not share it with any other party. The agreement also detailed payment terms and conditions, including a minimum annual business requirement of Rs. 6 lakhs and a bank guarantee of Rs. 3 lakhs from the agencies. For the assessment years 2002-2003 and 2003-2004, Prasar Bharati paid Rs. 2,56,75,165 and Rs. 2,29,65,922, respectively, to these agencies as commission.

Timeline

Course of Proceedings

The Assessing Officer (AO) held that the payments made by Prasar Bharati to the advertising agencies were “commission” as defined in Section 194H of the Income Tax Act, 1961. Consequently, the AO determined that Prasar Bharati should have deducted tax at source (TDS) from these payments. The AO calculated the tax and interest due for both assessment years, totaling Rs. 16,34,283 and Rs. 3,80,611 for 2002-2003, and Rs. 11,15,944 and Rs. 1,54,050 for 2003-2004, respectively.

Prasar Bharati appealed to the Commissioner of Income Tax (Appeals)-II, who upheld the AO’s decision. The Income Tax Appellate Tribunal, however, reversed these orders, ruling in favor of Prasar Bharati. The High Court of Kerala subsequently overturned the Tribunal’s decision, reinstating the orders of the Commissioner of Income Tax (Appeals) and the AO. Prasar Bharati then appealed to the Supreme Court.

Legal Framework

The core legal issue revolves around Section 194H of the Income Tax Act, 1961, which mandates the deduction of tax at source (TDS) on payments made as commission or brokerage. The relevant portion of Section 194H is as follows:

“194H. Commission or brokerage-Any person not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of five per cent.”

The explanation to Section 194H defines “commission or brokerage” as follows:

“Explanation- For the purposes of this section,-
(i)“commission or brokerage” includes 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 any asset, valuable article or thing, not being securities;”

Section 201 of the Income Tax Act, 1961, specifies the consequences of failing to deduct or pay tax as required under Section 194H.

Arguments

Appellant (Prasar Bharati)’s Arguments:

• The payments made to accredited advertising agencies were not in the nature of commission.
• The relationship between Prasar Bharati and the agencies was principal-to-principal, not principal-agent.
• Agencies purchased airtime from Prasar Bharati and sold it to their customers, retaining 15% as a discount, not commission.
• A different format of the agreement was mistakenly presented to the High Court, leading to an adverse order.

Respondent (Income Tax Department)’s Arguments:

• The payments were indeed commission as defined in Section 194H of the Income Tax Act, 1961.
• The relationship between Prasar Bharati and the agencies was that of principal and agent.
• The orders of the AO, CIT (Appeals), and the High Court were based on proper reasoning and should be upheld.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the payments made by Prasar Bharati to the advertising agencies were in the nature of “commission” as defined under Section 194H of the Income Tax Act, 1961, thereby requiring deduction of tax at source.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• Jagran Prakashan Ltd vs. Deputy Commissioner of Income Tax(TDS), (2012) 345 ITR 288 – Allahabad High Court: The Supreme Court distinguished this case, noting that the facts were different and that the Allahabad High Court itself had distinguished the case of CIT vs. Director, Prasar Bharti.

Statutes:

• Section 194H of the Income Tax Act, 1961: This section deals with the deduction of tax at source on commission or brokerage.
• Section 201 of the Income Tax Act, 1961: This section specifies the consequences of failing to deduct or pay tax as required under Section 194H.

Judgment

How each authority was viewed by the Court:

• The Allahabad High Court’s decision in Jagran Prakashan Ltd vs. Deputy Commissioner of Income Tax(TDS), (2012) 345 ITR 288* was distinguished because the facts of that case were different. The court noted that the Allahabad High Court itself had distinguished the case of CIT vs. Director, Prasar Bharti, which was the case before the Supreme Court.
• Section 194H of the Income Tax Act, 1961* was directly applied to the facts of the case. The court held that the payments fell within the definition of “commission” as defined in the explanation to the section.
• Section 201 of the Income Tax Act, 1961* was invoked because Prasar Bharati failed to deduct tax at source as required by Section 194H.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The explicit use of the term “commission” in the agreement between Prasar Bharati and the advertising agencies.
• The nature of the relationship between the parties, which the court determined to be principal-agent, not principal-to-principal.
• The fact that the payments were made to secure more advertisements for Prasar Bharati.
• The inclusive definition of “commission” in the explanation to Section 194H of the Income Tax Act, 1961, which covers payments made for services rendered on behalf of another person.

Logical Reasoning:

The court reasoned that the agreement between Prasar Bharati and the advertising agencies explicitly used the term “commission.” The court also determined that the relationship between the parties was that of principal and agent, where the agencies acted on behalf of Prasar Bharati to secure advertisements. Additionally, the payments were directly linked to securing more business for Prasar Bharati. The court also noted that the definition of “commission” under Section 194H is inclusive, covering any payment received for services rendered on behalf of another person. Therefore, the court concluded that the payments fell within the ambit of “commission” under Section 194H.

The court rejected the argument that the payments were a discount on airtime purchase, emphasizing that the agreement and the actual nature of the transaction indicated a commission payment. The court also distinguished the case of Jagran Prakashan Ltd, noting that the facts in that case were different.

The court stated, “the agreement itself has used the expression “commission” in all relevant clauses”. The court also observed, “the terms of the agreement indicate that both the parties intended that the amount paid by the appellant to the agencies should be paid by way of “commission””. The court further noted, “the definition of expression “commission” in the Explanation appended to Section 194H being an inclusive definition giving wide meaning to the expression “commission”, the transaction in question did fall under the definition of expression “commission” for the purpose of attracting rigor of Section 194H of the Act.”

The court unanimously held that the payments made by Prasar Bharati to the advertising agencies were indeed commission and thus, subject to tax deduction at source.

Key Takeaways

• Payments made to advertising agencies for securing advertisements can be considered “commission” under Section 194H of the Income Tax Act, 1961.
• The substance of the transaction and the terms of the agreement determine the nature of the payment, not merely the label used.
• Taxpayers must deduct tax at source on commission payments as mandated by Section 194H to avoid penalties under Section 201.
• The definition of “commission” under Section 194H is inclusive and covers a wide range of payments made for services rendered on behalf of another person.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The ratio decidendi of this case is that payments made by a principal to an agent for securing advertisements, which are termed as “commission” in the agreement between the parties, fall within the definition of commission under Section 194H of the Income Tax Act, 1961, and are therefore subject to tax deduction at source. This judgment reinforces the inclusive nature of the definition of “commission” and clarifies that the substance of the transaction, rather than the label used, determines whether a payment is commission for the purposes of Section 194H. There is no change in the previous position of law but it clarifies the position of law.

Conclusion

The Supreme Court dismissed the appeals filed by Prasar Bharati, upholding the High Court’s decision. The court concluded that the payments made by Prasar Bharati to advertising agencies were indeed “commission” as defined under Section 194H of the Income Tax Act, 1961, and therefore, Prasar Bharati was liable to deduct tax at source on these payments. This judgment reinforces the application of Section 194H to commission payments in the context of advertising services and highlights the importance of compliance with tax deduction at source provisions.