Multinationals (MNCs) operating in India have been dealt a hammer blow after a special bench of the Income Tax Appellate Tribunal (ITAT) ruled that a large percentage of the costs of advertising, marketing and promotional (AMP) expenses incurred by their Indian subsidiaries to promote their brands will be taxable in India.

The decision will be binding on other division benches of the tribunal unless overruled by a high court.

The tribunal invoked the retrospective amendment to Section 92CA(2B) of the Finance Act, 2012, effective from June 1, 2002, granting powers to transfer pricing officers to probe transactions not reported by taxpayers. It also upheld the usage of the Bright Line test, which uses the expenses incurred by comparable companies, to decide arms' length pricing.

The ruling emerged following an appeal by LG Electronics - the world's second-largest TV manufacturer - which faced transfer pricing adjustments of £10.9m for the assessment year 2007-08.

Some 14 other MNCs with Indian operations have disputed the decision of the transfer pricing officer. Pepsi Foods, Maruti Suzuki, GlaxoSmithKline, Bausch & Lomb, Canon and Sony, all faced transfer pricing adjustments on excessive AMP.