India - Special bench ruling on marketing intangibles in case of LG Electronics India Pvt. Ltd.

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The much awaited ruling of the special bench of the Delhi Income-tax Appellate Tribunal (the Tribunal) in respect of marketing intangibles in the case of LG Electronics India Pvt. Ltd. LG Electronics India Pvt. Ltd. v. ACIT [2013] 29 300 (Delhi) (SB) was pronounced yesterday.

LG Electronics Inc. (LGK or the associated enterprise or AE) is a Korean company engaged in the manufacture, sale and distribution of electronic products and electrical appliances. LG Electronics India Pvt. Ltd. (LGI or the taxpayer) is its wholly owned subsidiary in India. During the transfer pricing (TP) assessment proceedings, the transfer pricing officer (TPO) alleged that the taxpayer has incurred excessive advertising, marketing and promotion (AMP) expenses in comparison to comparable companies. The difference was considered by the TPO to be AMP incurred by the taxpayer on brand promotion for the AE, which should have been compensated by the AE to the taxpayer. The TPO thus made an adjustment for the difference, which was upheld by the Dispute Resolution Panel (DRP). The DRP Panel additionally observed that a mark-up on the AMP expenses was also warranted. Against the order of the DRP, LGI filed an appeal with Delhi Tribunal.

While adjudicating the appeal, the Tribunal concluded that, based on the facts of the case, the TP adjustment in relation to the AMP expenses incurred by the taxpayer for creating or improving the marketing intangible for and on behalf of the AE is permissible. The Tribunal also held that earning a mark-up from the AE in respect of AMP expenses incurred on behalf of the AE is also allowable.