The practice of charging foreign TV companies a normal tax rate on the presumptive profit of 10 per cent earned through advertisements in India has been challenged in the Delhi High Court through a public interest litigation, which maintains that the Income Tax Act already has provisions to estimate the incomes of nonresidents.
The PIL filed by advocate B L Wadhera has challenged two circulars by the Central Board of Direct Taxes — dated May 2, 1996 and April 15, 1998 — on the grounds that they have been issued solely to benefit the foreign TV companies.
According to the petition, the impugned circulars had caused a reduction in the rate of taxation for foreign TV companies from 55 per cent during the assessment years 1995-96 to 1997-98 to 48 per cent from 1998-99.
The effective rate, thus, worked out to 3.8 per cent for the years 1995-96 to 1997-98 and 3.3 per cent from 1998-99 onwards on ad revenues of the foreign TV companies. If calculated in terms of the normal rate of tax which was in force in those particular years.
Wadhera alleged that CBDT’s first circular was based on a presumption that ad agencies working for foreign channels were retaining 15 per cent of the gross amount earned by these companies, while their Indian agents were keeping another 15 per cent of their gross earnings. However, foreign channels which do not have an office in India operate only through agents, and were taking away the remaining 70 per cent of the revenue earned on advertising.