The income tax department has got a shot in the arm, with a special bench constituted by the Income Tax Appellate Tribunal (ITAT) ruling 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.

Tax lawyers, however, say this dispute would also land in higher courts, along with other transfer pricing cases. It can also open the floodgates to similar demands raised against other multinationals operating in India.

LG’s advertising & marketing spends in calendar year 2012 were Rs 550-600 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.

An email to LG elicited no response. 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 Rs 161 crore.

“This year, the tax department has made very large adjustments, of up to $10 billion. Most of these are made against MNCs on transfer pricing which will have a negative impact on investments in India,” said Rohan Shah, a tax lawyer with, Economic Laws Practice.

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 MNCs operating in India.

“This ruling has set the tone for the year 2013 and taxpayers are bound to be dismayed by the fallout, which will be across the board for a significantly large number of companies. Moreover, the fallout will not be restricted to large MNCs spending huge amounts on advertising and marketing; it will be on all companies,” says Shah.

“These matters will lead to more litigation and the Supreme Court will have to take a final call on this,” a lawyer says.

Daksha Baxi, a partner with Khaitan & Co, says the tax department has made record adjustments against multinationals this year. That might hit investments. “I hope the Budget brings some clarity on transfer pricing issues, so that investors know before investing in India what will be the tax impact on the Indian entity,” she says.

Lawyers say these adjustments were made when the retrospective amendments to the Finance Act, 2012, were not proposed. “It is undeniable that this issue is only set to increase further, as revenue authorities would now apply the principle in all cases, which will only result in further litigation,” a tax lawyer says.

Who's next?

The LG versus IT department case has also invited interest from many other MNCs operating in India.These 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.