ITAT Deletes ₹444 Crore TP Adjustment on Netflix India, Rules Company is a Limited-Risk Distributor [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) deleted a transfer pricing adjustment of Rs. 444.93 crore made on Netflix Entertainment Services India LLP after holding that the company acted only as a limited-risk distributor and not as a content or technology provider.

The case arose after the Transfer Pricing Officer (TPO) recharacterised Netflix India’s role, stating that it was not merely distributing access to the Netflix streaming service but was providing content and technology to Indian subscribers.

Based on this finding, the TPO applied the “Other Method” under Rule 10AB of the Income Tax Rules and determined that 57.12% of Netflix India’s revenue represented royalty payments for use of content and technology.

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The Dispute Resolution Panel (DRP) upheld this view, observing that Netflix India performed several key functions and owned technological assets such as Open Connect Appliances (OCAs), which it considered critical to Netflix’s streaming operations in India.

The assessee’s counsel argued that it only distributed access to the Netflix platform under agreements with its foreign affiliates, did not own or license any intellectual property, and earned a fixed margin of 1.36% on costs.

The counsel explained that OCAs were only cache servers used to improve streaming speed, not valuable technological assets. They relied on the Supreme Court’s ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT, which held that payments for access rights do not amount to royalty.

The department’s counsel defended the TPO’s findings, arguing that Netflix India operated as a full-fledged service provider responsible for marketing, customer relations, and infrastructure management in India. They further argued that the company bore entrepreneurial risks and that the use of the “Other Method” based on royalty rates was justified given the unique nature of Netflix’s streaming business.

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The bench comprising Amit Shukla (Judicial Member) and Renu Jauhri (Accountant Member) observed that Netflix India’s distribution agreement clearly limited its role to providing access, with all intellectual property remaining with its parent entities.

The tribunal found that the TPO’s recharacterisation was contrary to the contract and unsupported by evidence. It further observed that the “Other Method” and the DRP’s ad-hoc margin allocation had no legal or economic basis.

The tribunal explained that the Transactional Net Margin Method (TNMM) applied by Netflix India was appropriate for its low-risk profile and consistent with judicial precedents. The tribunal deleted the entire ₹444.93 crore adjustment and partly allowed the appeal.

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