India vs. L.G. Electronic India Pvt. Ltd., January 2019, TAX APPELLATE TRIBUNAL, Case No. ITA No. 6253/DEL/2012

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LG Electronic India has incurred advertisement and AMP expenses aggregating to Rs.6,89,60,79,670/- for the purpose of its business.

The tax authorities undertook benchmarking analysis of AMP expenses incurred by LG Electronic India applying bright line test by comparing ratio of AMP expenses to sale of LG Electronic India with that of the comparable companies and holding that any expenditure in excess of the bright line was for promotion of the brand/trade name owned by the AE, which needed to be suitably compensated by the AE.

By applying bright line test, the tax authorities compared AMP expenditure incurred by LG Electronic India as percentage of total turnover at 8.01% with average AMP expenditure of 4.93% of comparable companies. Since AMP expenses incurred by LG Electronic India  as percentage of sales was more than similar percentage for comparable companies, LG Electronic India had incurred such AMP expenditure on brand promotion and development of marketing intangibles for the AE.

The tax authorities also made an adjustment to the royalty rate paid to the parent for use of IP.

Finally tax deductions for costs of intra-group services had been disallowed.


In regards to the AMP expences the court states: “we are of the view that the Revenue has failed to demonstrate by bringing tangible material evidence on record to show that an international transaction does exist so far as AMP expenditure is concerned. Therefore, we hold that the incurring of expenditure in question does not give rise to any international transaction as per judicial discussion hereinabove and without prejudice to these findings, since the operating margins of the assessee are in excess of the selected comparable companies, no adjustment is warranted.

In regards to the royalty rate the court states: “we direct the TPO to determine the Arm’s Length royalty @ 4.05%

In regards to intra group services the court states: “we are of the opinion that once the assessee has satisfied the TNMM method i.e. the operating margins of the assessee are higher than those of the comparable companies [as mentioned elsewhere], no separate adjustment is warranted.”



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