The income-tax (I-T) department has issued show-cause notices to a few television channels and production houses for allegedly not deducting tax at source (TDS) on payments made towards professional and technical services for three-and-a-half years between 1 April 2007 and 30 September 2010, says an I-T official familiar with the development.
The TDS wing of the I-T department in Mumbai recently issued the notices after it carried out a survey in October on a few firms, including Star India Pvt. Ltd (Star Plus), Multi Screen Media Pvt. Ltd or MSM (Sony), Viacom18 Media Pvt. Ltd (Colors), Zee Entertainment Enterprises Ltd (Zee TV), and production companies Endemol India Pvt. Ltd, Yash Raj Films Pvt. Ltd (YRF), Nadiadwala Grandson Entertainment Pvt. Ltd and Baba Arts Ltd to scrutinize their tax payments.
The agency has found that most of the firms had deducted tax at 2% instead of 10% as prescribed in the norms.
An I-T department report on these four channels and some production houses, reviewed by Mint, has pegged the total tax liability at Rs.300 crore, including interest.
A show-cause notice is not an indictment. It only requires the company that receives such a notice to explain its position, typically within a month.
The I-T department has asked the firms why they should not be penalized for the incorrect deduction. “We have issued show-cause notices to some of them and are in the process of issuing notices to the rest in next few days,” said the official, but declined to specify the firms to whom the notices have already been sent. He did not want to be named as he is not authorized to interact with media.
Uday Shankar, chief executive officer, Star India, said: “Firstly, we haven’t got any show-cause notice from the income-tax department. They did a TDS survey of Star and other broadcasters, but only for the current year. All allegations are baseless and taxes have been deducted adequately as per specifications.”
Zee Entertainment, MSM and Viacom18 declined to comment on the matter. Production houses Nadiadwala and Endemol also declined to comment.
The official spokesperson of Baba Arts remained unavailable and did not respond to emails and phone calls.Online GST Certification Course by TaxGuru & MSME- Click here to Join
Rafiq Gangjee, vice-president, marketing and communications, YRF, said: “YRF has been deducting taxes as per law. Further, it is the channel that deducts taxes on IPR (intellectual property rights) licensed to them and not YRF. We’d also like to clarify that the department found everything in order during the routine survey conducted a few weeks ago and has not served any show-cause notice on us.”
According to the report, Star, MSM, Zee and Colors had paid about Rs.950 crore in the last three years for the purchase of prime-time band frequency from cable operators. These firms had deducted tax at 2%.
The department said the firms should have deducted tax at 10% as the service rendered to them is technical in nature.
“We have also found that the production houses had not deducted tax at 10% for professional services provided to them,” said the same official.
Under I-T norms, an assessee should deduct 10% as income tax on payment of fee for professional or technical services and royalty.
Sandeep Ladda, executive director, PricewaterhouseCoopers India, said a many of the tax norms for media broadcast companies and production houses were open to interpretation and depended on how individual contracts were structured.
“In section 194C, where any ‘work’ is performed by a cable company for a broadcaster, the tax deduction rate should be 2% at source. But then, the contract should meet the definition of ‘work’ defined in the section; it may be liable for 10% tax deduction if the contract is in nature of technical services as defined in section 194J and the nature of the services fit in the meaning of the words—‘managerial, consultancy and technical services’, all of which have a broad meaning,” he said.
Anand Shah, research analyst at domestic brokerage Angel Broking Ltd, said Hindi general entertainment channels paid at least Rs.50 crore annually to cable operators for carriage on the prime band.
“Nearly Rs.1,000 crore goes from the broadcast industry to cable operators for carriage fees in any given year. The carriage fee differs from cable operator to operator and from channel to channel. A new channel such as Colors may have to pay greater carriage fees than an established player such as Zee or Star,” Shah said.
According to him, there are no published figures to go by as this is a vastly under-declared and unorganized market.
The I-T report also pointed out that MSM, Viacom18 and Zee Entertainment had incorrectly deducted tax on production expenses of about Rs.1,200 crore. These expenses include transfer of IPR and other intangible rights from the programme producers.
Ladda said TDS deduction was a complex area for production houses. “There is no withholding in the case of IPR ‘transfer/sale’ from a production house to a media broadcaster, as there is no service/work rendered. But in the case of ‘licensing’ of an IPR/format, it may come under the meaning of royalty under section 194J,” he said. In this case, TDS should be deducted at 10%.
But if a broadcaster has an original show format in mind (in which case it holds the rights) and the production house implements that by providing manpower, sets, etc., then it could come within the meaning of “work” specified in section 194C. In this case, the TDS rate is 2%.
“Depending on the facts in some cases, it is possible that the revenue authorities may interpret that section 194J is applicable, leading to applicability of TDS at 10%.” Ladda said.