Finance Guru: Advertisement

Advertising agencies provide a wide variety of services, from the development of the advertisement to its placement in the appropriate media. For each of these services, a variety of different payment options are available, from straight fee to commission basis, or some combination of the two. The auditor's job is to understand the compensation formula thoroughly, and to test the agency's records and documentation in support of the charges.

Each agency will have its own unique aspects, based on the type of work the agency has been hired to perform. The internal auditor cannot take a "boiler-plate" approach to the contract but should examine the contracting situation carefully to identify the unique audit needs of that agreement. This will require a high level of audit expertise, and the most seasoned internal audit professionals will need to be involved in the contracting process. Careful planning at the contract stage will allow far more effective and efficient auditing later.

Agency Services

There are three basic types of ad agency services: developing the advertising strategy and material, producing the advertising material, and media placement.

Developing the Advertising

Strategy and Material

At this stage, the agency develops the advertising plans and strategy and identifies the right advertising material for reaching the required marketing objective.

Production

Processes involved in producing advertising material will obviously vary according to the kind of piece it is. The auditor should review the supporting documents for production charges; the controls used to approve and pay invoices the agency receives for production work; and the controls used to ensure that the correct invoices are charged to the job.

Media Placement

The cost of media placement represents one of the most significant elements in an advertising program, and the auditor should give careful attention to this area. The type of media used will determine, to a large extent, the kind of methods the auditor will use in conducting this portion of the audit. One suggested procedure for network television time is to schedule media billings and trace them to appropriate supporting documents (Exhibit 2).

Generally, the agency will invoice the company based on their estimate of the monthly cost for media placement, i.e., network television time. The agency's estimate is based on the media plan established at the beginning of the year by the company's marketing department and the agency. The auditor should review these estimates to see that they fairly reflect the actual invoices received from the agency.

At the same time, the auditor should compare the actual invoices received from the agency to the invoices the agency received from the media. Also, it is a good idea to review the agency's cancelled checks in payment of these media invoices. There will be times when the estimate invoice will not be the same as the actual invoice. In these instances, the agency should either credit the company on the next invoice or charge the company for any additional time purchased. If the estimate charges are consistently and significantly greater than the actual media billings, the auditor should investigate the reasons.

The amount of cash discounts can be significant in media placement. The auditor should verify that the agency is taking advantage of all cash discounts and passing them along to the company in accordance with the agreement.

If the agency is compensated on a fee basis, the auditor should be able to trace the time reported to the company for a given job to the supporting time records at the agency. The review of media placement invoices can be simplified through the use of microcomputer spreadsheets, as illustrated in Exhibit 2.

Agency Expenses

Depending on how the agreement with the agency is written, the company may be responsible for paying out-of-pocket expenses incurred by the agency on behalf of the company. The auditor's review of these out-of-pocket expenses should include the type of expenses incurred, whether the expense are reasonable, and whether the agency has supporting documentation for these expenses.

For example, the contract may require that certain fees and related business costs be reimbursed to the agency. The auditor should be alert for unusual cases to determine the appropriateness and accuracy of the agency charges.

Agency Internal Controls

The auditor should review the agency's controls to be certain they are adequate and can be audited. The review should cover such areas as invoice approval and payment methods; procedures for capturing, tracking, and reporting billable time; procedures governing commissions; and verification of media placement. Without an adequate control system, the agency cannot assure accurate and consistent charges, and the auditor has no basis on which to examine the agency's supporting documentation. Exhibit 4 provides a questionnaire that may be used in assessing controls.

ADVERTISING AGENCY

Date of Introduction: 01.11.1996 vide Notification No.6/96-ST dt. 31.10.1996.

Definition:

Advertising agency means any commercial concern engaged in providing any service connected with the making, preparation, display or exhibition of advertisement and includes an advertising consultant.

(Section 65(3) of Finance Act, 1994 as amended)

Taxable Event And Scope Of Service:
Taxable Service means any service provided to a client by advertising agency in relation to advertisement in any manner. (Section 65(72)(e) of Finance Act, 1994 as amended)

Value of Taxable Service:

The value of taxable services in relation to service provided by an advertising agency to a client shall be the gross amount charged by such agency for services rendered in relation to advertisements.

(Section 67 of Finance Act, 1994 as amended)

The above value, includes the gross amount charged by the agency from the client for making or preparing the advertisement material, irrespective of the fact that the advertising agency directly undertakes the making or preparation of advertisement or gets it done through another person as well as the commission received by the agency. However, the amount paid excluding their own commission by the advertising agency, for space and time in getting the advertisements published in the print media (i.e. newspapers, periodicals, etc.) or in its Broadcasting will not be includible in the value of taxable service.

The value includes the charges on account of travel, transportation and hotel stay.

If the market Survey / Research relates to the advertisement, all expenses that are charged from the client on account of Market Survey/Research relating to advertisement are includible in the value of taxable service.

The amount charged by foreign TV channels directly to their clients in foreign currency is not includible as these amounts are not charged by the Advertising Agency from the clients.

(Ministry’s F.No.341/43/96-TRU dt.31.10.1996)

Service Tax would be payable on the gross amount charged by the Advertising Agency from the Clients. The exclusion of cost of paper and printing is not permissible, as it constitutes a component of service provided.

In cases where the advertisement is given by the client in the newspaper through Advertising Agencies, the Service Tax would be leviable on the agency charges of the Advertising Agency, not on the total charges recovered from the clients.

Exemption & Exclusion:

i. The services provided by the Advertising Agencies to United Nations, an International Organization and certain specified Diplomatic Missions are exempted from payment of Service Tax. (Authority: Notification No. 48/98-ST dt.24.04.1998, 44/98-ST dt.22.01.1998, 47/98-ST dt.24.04.1998)

ii DAVP not being a commercial concern is not liable to pay Service Tax in respect of the services rendered by it to other Central Government Departments.

iii. Film/documentary produced by the Film Producer is not leviable to Service Tax provided that the advertising agency makes the payment of Service Tax on including the value of Film/documentary. In case the film producer chooses to charge

the client directly, in that case he has to pay Service Tax

accordingly.

(Ministry’s F.No.341/43/96 TRU dt.31.10.1996)

iv. The Service rendered by local cable Television operators of mere display of Advertisements in the Television Channels Broadcast through Electronic media and charges collected from Customers in respect of the cost of space and time for such display would not be leviable to Service Tax.

(Ministry’s F.No.341/51/2000 TRU dtd.22-11-2000)

v. Release of advertisement directly in the News Papers (not through advertising agency) by the clients, is not covered by Service Tax as service is being provided by the news paper and not the advertising agency.

Case Law:

Hon’ble High Court of Gujarat in the case of Addition Advertising Agency vs. U.O.I. [1998(98) E.I.T.14 (Guj)] held that the subject of tax is not talking on Advertising service but on actual rendering of service and the measure of tax as well as charging provision of tax is based on the gross amount paid for service. It is further held that the tax is not on Advertisement but is on the services rendered with reference to the Advertisement and there is a clear distinction between the Advertisement and Advertising Services and upheld the levy of Service Tax on Advertising Agency.

Service Tax on Advertising Agencies

The representations have been received in this officer with regard to the leviability of Service Tax under the category of Advertising Agency Services in respect of Persons agencies engaged in canvassing for advertisements for which they get commission from the publishers. The persons involved do not provide any service like making, preparing, displaying and exhibiting and only undertaking canvassing for the advertising.

2. The term canvassing may merely involve contacting potential advertisers and persuading them to give advertisement to a particular newspaper/periodical/magazine. The making and preparation of the advertisement namely, drafting of the text, preparation of layout is left either to the advertiser or to newspaper/periodical/magazine. Such a service is known as ‘space selling’. In such cases, since the agency undertaking the job of merely brining the order for an advertisement and does not undertake any further activity. It would not fall within the definition of advertising agency and will not be subjected to service tax.

3. On the other hand, ‘canvassing’ may involve such agency approaching a customer, receiving the texts of the advertisement (including photographs, monograms etc. of the customs), estimating the space that such advertisement would occupy in the newspaper/periodical/magazine, negotiating the price, informing the general layout of the advertisement that would finally appear in such newspaper etc. In such cases the term ‘canvassing’ would certainly fall within the phrase ‘any service provided ----------in any manner connected to making, preparing, displaying and exhibiting’ and would be taxable service.’

4. In view of above, I have been directed to say that if the canvassing is limited to space selling then such services would not be liable to any service tax. However, if canvassing is involving receiving the text of advertisement, estimating the space that such advertisement would occupy in the newspaper/periodical/magazine, negotiating the price, forming the general layout of the advertisement that would finally appear in the newspaper then such activity would be liable to service tax under the category of Advertising Agency Service.

5. The field formations may suitable be informed.

6. Trade Notice may be issued for the information of the trade.

7. The receipt of this Circular may kindly be acknowledged.

Sd/-
(Sanjiv Srivastava)
Deputy Secretary to the Government of India

[F. No. 168/01/2003-CX.4]