Mumbai: And now, ad-free television? Not quite.

Almost 80% of advertisements across television channels were dropped on Wednesday because of a dispute between broadcasters and media buying agencies over billing, which may cost the industry some 40 crore a day.

Still, both sides remain in talks and the contours of a compromise may be emerging with advertisers putting pressure on their agencies to resolve the dispute quickly.

“The drop in advertising is significant except with those agencies and advertisers that are willing to move to tax-compliant practices," said Shailesh Shah, secretary general of the Indian Broadcasting Foundation (IBF) grouping of TV channels.

There was at least one exception, however, to the industry-wide move.

Multi Screen Media Pvt. Ltd (MSM), which telecasts the Indian Premier League on its channels SET Max, Six and Six HD, didn’t take advertisements off air during the match broadcasts. MSM executives confirmed that the broadcaster did not drop ads after IBF made an exception.

The broadcasters locked horns with media agencies over billing practices after the TV stations got notices from the income-tax (I-T) department for non-payment of tax deducted at source on the 15% agency commission shown on the bills presented to the media agencies by broadcasters. The latter want to switch to a net billing system from the current gross billing system.

In discussions on Wednesday, advertising agencies suggested that they be allowed to work on net billing with some clients and on gross billing with others. Gross billing is the value of the bill, including the 15% agency commission. Net billing is the value of the bill minus the commission.

“Almost 80% of the dealings between advertisers and their agencies is on a fixed-fee basis. These agencies can move to a net billing practice," said a senior member of the Indian Society of Advertisers (ISA), who did not want to be identified. “It is only some public sector advertisers that work on a commission basis with their agencies. And even then the commission isn’t 15%, it is much lower. So these agencies can continue with gross billing."

“We will stick to our stand of not airing ads of those agencies that are not shifting to the net billing system," said a Star India Pvt. Ltd executive close to the discussions, who did not want to be named.

Advertising Agencies Association of India (AAAI), ISA and IBF members are taking part in the talks aimed at ending the row.

“Advertisers are beginning to put pressure on media agencies as their campaigns have been dropped," said an executive from a media buying agency, who spoke on condition of anonymity.

India’s estimated 13,000 crore television broadcasting industry has been in negotiations with the advertising agencies for about a month over switching billing methods.

“AAAI is in discussion with IBF and ISA. You will hear from us the moment these discussions are concluded. We are hopeful that this will happen by tomorrow (2 May) evening," said Arvind Sharma, president of AAAI and chairman and chief executive officer (Indian subcontinent) at Leo Burnett.

The broadcasters claim they list the 15% commission on the bill at the behest of the agencies, although no such transaction takes place and no money is actually paid. They were, therefore, not deducting tax on this amount.

The total tax liability runs into more than 1,000 crore due over the past three years. At least 30 channels in Delhi, Mumbai, Chennai and Kolkata have got the notices, and Shah of IBF said on Tuesday that he expects more to receive them.

IBF last week sent out an advisory to members to send bills on a net basis to the agencies.

Separately, the channel owners are also planning to appeal against the I-T department’s order.

“Except that, even for the appeal, we have to deposit 50% of the money upfront. It is a huge cash flow issue," Shah said on Tuesday.

The 15% commission dates back to a time when full-service agencies actually worked on commission, before the media and creative duties of an agency were split.

Traditionally, agencies functioned as agents of the media outlet, booking ads on behalf of media owners—print or television, Meenakshi Menon Madhvani, managing partner at Spatial Access, a media audit company, explained on Tuesday.

They would bill advertisers the full amount and show 15% as a commission from the media owners.

“What they told their advertisers was that their commission was coming from the media owners and not the clients," she said.

The media owner got taxed on the 85% while the agency was taxed on the 15%.

That practice has remained on paper even though it doesn’t exist any more.

For the last 10 years, the practice is that media agencies receive a 1-3% commission while creative agencies work on a 6-9% commission depending on how these are negotiated.

A top executive at a consumer goods company explained why net billing may affect the agencies adversely.

“Even the 2-3% media commission and 8% commission to creative agencies is charged on gross billing. If channels insist on net billing, the agencies will lose revenue as we will then pay them commission on net billing, which is much lower," this person said, requesting anonymity.

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