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    Content Supply Services Vs Sale Of Space For Advertisement – Impact Under Service Tax

    Service tax on sale of space or time for advertisement was introduced with effective from 01.05.2006. This entry covers other modes of advertisements like advertisements in internet, motion pictures, television serials, video and music albums, mobile phones, ATMs, films and television serials. The said entry also covers advertisements on vehicles and buildings. However, the sale of space for advertisement in print media is exempted from the levy. The subject levy continued without any major changes till 30.06.2012.

    When the taxation of services is shifted from the positive base to the negative base with effective from 01.07.2012, the sale of space or time for advertisement was notified in the negative list under Section 66D of Finance Act, 1994. Entry (g) of Section 66D ibidread as ‘selling of space or time for advertisements other than advertisements by broadcast by radio or television’.

    In the negative list based taxation, the sale of space or time for advertisement other than advertisements by broadcast by radio or television are not subjected to service tax. The entry (g) was continued in the statue without any changes till 30.09.2014. With effective from 01.10.2014, the entry (g) in Section 66D ibid was replaced with new entry which read as ‘selling of space for advertisements in print media’.

    That is to say, only from 01.10.2014, selling of space for advertisements in print media is only not subjected to service tax. All other forms of advertisements are subjected to service tax including advertisements in internet. From the above, it is clearly evident that for the period 01.07.2012 to 30.09.2014, selling of space or time for advertisements in internet or website are not subjected to service tax because of the entry in the negative list during such period. To summarise, we wish to present the taxability of the said service at different points of time as under:

    S.No.

    Period

    Taxable

    Not Taxable

    1.

    01.05.06 to 30.06.12

    All

    Print Media

    2.

    01.07.12 to 30.09.14

    Television and Radio

    All

    3.

    01.10.14 to till date

    All

    Print Media

     

    In this article, we shall understand as to what constitutes sale of space or time for advertisements on the internet platform by taking a case study.

    Let us say, there is a company located in India ‘AwesomeLtd’ who aggregates or develops content. Awesome Ltd can exploit the content by placing it on their website www.awesome.com and earn revenue by selling the space of their website to various advertisers. Alternatively, if Awesome Limited thinks that the percentage of people visiting their website is low, they can enter an agreement with Google Inc, United States of America to display their content in www.youtube.com .

     

    Let us assume that Awesome Limited has entered an agreement with Google Inc to host their content in YouTube. Google Incenters agreements with various other parties depending upon the content to place their advertisements either in the beginning, middle or end of the content, thereby generating advertisement revenues. Google Inc shares such advertisement revenue with the Awesome Limited based on the agreement entered among them.

    Since Google Inc is located in non-taxable territory and Awesome Limited is located in taxable territory and the consideration is received in convertible foreign exchange and the consumption of the service as per Place of Provision of Service Rules, 2012 is in non-taxable territory, Awesome Limited has claimed the said services as export of services and accordingly not subjected to service tax.

    Now, the question that has to be answered for the purposes of service tax is ‘Whether Awesome Limited is engaged in sale of space or time for advertisement for the period 01.07.2012 to 30.09.2014?’

    Consequences – If services provided by Awesome Limited are ‘Sale of Space or Time for Advertisement’:

    Before answering the above question, let us try to understand the impact of the transaction if the response to the above is ‘Yes’. Awesome Limited shall not be eligible to call the services provided by them as to ‘Export of Services’, since one of the condition specified in Rule 6A of Service Tax Rules, 1994 shall not get satisfied. One of the conditions specified in Rule 6A ibid is that the service exported shall not be one which is mentioned in Section 66D of Finance Act, 1994.

    If the service is called ‘sale of space or time for advertisement’, then the said service for the period 01.07.2012 to 30.09.2014 is mentioned in negative list and accordingly the services provided by Awesome Limited shall not be qualify as export of services, since negative list services cannot be exported in light of Rule 6A of Service Tax Rules, 1994.

    Once the said services cannot be called as ‘export of service’, then the services provided by Awesome Limited shall become an ‘exempted service’ as per Rule 2 (e) of Cenvat Credit Rules, 2004 because the definition of ‘exempted service’ excludes only export transactions which satisfy the conditions mentioned in Rule 6A of Service Tax Rules, 1994.

    The moment the services provided by Awesome Limited are treated as an ‘exempted services’, the obligation to reverse the cenvat credit as per Rule 6 of Cenvat Credit Rules, 2004 arises. Accordingly, Awesome Limited shall reverse 7% of the value of exempted services (income generated from Google Inc) and restrict the cenvat credit accordingly or apply proportionate formula as prescribed in sub-rule (3A) of Cenvat Credit Rules, 2004.

    1There are various methods in which a website sells advertisement to advertisers namely Cost Per Mille (CPM), Cost Per Click (CPC) or Cost Per Action (CPA) and others. In the current article, we are not dealing with the types of advertisements as our discussion is restricted for the purposes of service tax.

     

    Analysis – Whether services provided by Awesome Ltd are ‘Sale of Space or Time for Advertisement’:

    In order to fall under the category of ‘Sale of space or time for advertisements’, the pre-requisite is to have such space or time, so that the same can be exploited to generate income and accordingly service tax shall come into play. Hence, the question that has to be answered is whether Awesome Limited has either space or time to call the services provided by Awesome Limited as ‘sale of space or time for advertisement’.

    To answer the above question, we have to understand the business model involved herein. As stated above, Awesome Limited has entered an agreement with Google Inc to display the former’s content on Google Inc’s website. As part of the agreement, Awesome Limited is only entitled to create a page or channel on www.youtube.com (with only very restricted rights), which displays prominently the brand/logo of Awesome Limited.

    Google Inc based upon the content decides the advertisements to be displayed either as a part of the content or on the page. Based on revenues generated, Awesome Limited shall be entitled for a share of the revenue for granting Google Inc a right to display the content. Further, Awesome Limited is not allowed to include any promotions, sponsorships or other advertisements as part of the content supplied to Google Inc.

    Hence, from the above it is evident that Awesome Limited does not have either space or time, since the website/page where content is hosted for public viewing does not in any way belong to them. Hence, the question of selling of space or time for advertisement does not arise.

    Hence, in this context, it can be concluded that Awesome Limited is not engaged in ‘sale of space or time for advertisement’, the services involved are mere content supply and accordingly the said services does not fall under the entry (g) of negative list and accordingly the services provided by Awesome Limited shall be export of services and the reversal of cenvat credit is unwarranted.

    The law pertaining to taxation of digital transactions is in nascent stage and CBEC has to come with various business models involved in digital era and accordingly clarify the taxability of such modelsso that litigations may be avoided.

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