LG Electronics faces tax demand for excessive ad spend

A special bench constituted by the Income Tax Appellate Tribunal (ITAT) has ruled that consumer electronics major LG Electronics India is liable to pay tax on ''excessive'' advertising and marketing spends in the country, leading to notional benefits to its parent company.

A report in the `Business Standard' newspaper said that according to tax lawyers this dispute would land in higher courts, along with other transfer pricing cases. It could also open the floodgates to similar demands raised against other multinationals operating in India.

LG's advertising and marketing spends in calendar year 2012 were Rs550-600 crore. These were for products across audio-visual, home appliances, information technology and mobile phones. The tax adjustments were made for the 2009 assessment year.

The ITAT ruling says excessive advertising and marketing spends by LG constitutes an international transaction. The tax department and the dispute resolution panel had earlier held that since the advertising expenses incurred by LG as a percentage of its sales were significantly higher than the expenses incurred by two comparable companies, it was promoting the brand owned by its foreign parent.

Accordingly, the tax departments argued LG India should have been adequately compensated by its Korean parent for the excessive spending of close to Rs161 crore.

Lawyers say this is a landmark judgment that has come as good news for the revenue authorities, who, until recently, were at the receiving end of the appellate authority's orders. But this could be bad news for multinational companies operating in India.

The LG versus I-T department case has invited interest from many other MNCs operating in India. Such companies were interveners in the case as interested parties. They include Haier Telecom, LVMH Watch, Haier Appliances, Goodyear India, Glaxo Smithkline Consumer, Maruti Suzuki India, Sony India, Bausch & Lomb Eyecare, Fujifilm Corporation, Canon India, Daikin Airconditioning, Amadeus India, Star India, and Pepsi Foods, according to the report.