Pranav B Prem

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has set aside a ₹445 crore transfer pricing adjustment made against Netflix India, holding that the Revenue’s approach of treating the company as a licensee of intellectual property owned by Netflix US was legally unsustainable. The Bench comprising Amit Shukla (Judicial Member) and Renu Jauhri (Accountant Member) observed that the Revenue’s conclusions were based on a fundamental mischaracterization of Netflix India’s role within the global group structure. The Tribunal held that attributing nearly half of Netflix’s global subscription revenue to its Indian subsidiary, which neither owns nor develops the underlying content or technology, violates the arm’s length principle enshrined in transfer pricing law.

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Background

The case arose out of a transfer pricing adjustment made by the Transfer Pricing Officer (TPO) for the assessment year 2021–22, treating Netflix India as a licensee of Netflix’s global content library and streaming technology. The TPO held that Netflix India should have paid deemed royalty and license fees for access to the intellectual property, far exceeding its declared profit margin of 1.36% on Indian operations. This adjustment, amounting to ₹445 crore, was confirmed by the Dispute Resolution Panel (DRP) on September 28, 2024, which described Netflix India as an “extremely significant contributor” to Netflix’s global operations and a risk-bearing entity. The final assessment order was passed on October 25, 2024.

Netflix India’s Contentions

Netflix India argued that it only performs distribution and marketing support functions for its parent company and has no ownership or license over the content or proprietary technology. The company pointed out that its agreements explicitly provide that Netflix India “did not acquire any intellectual property rights, nor was it entitled to any proprietary rights in respect of the service architecture, content, trademarks, or technology comprising the Netflix Service.” It was further contended that Netflix India operates as a limited-risk distributor earning a fixed operating margin, which insulates it from business fluctuations. The company also clarified that its Open Connect Appliances (OCAs) — storage devices installed to enhance streaming efficiency — contain no user data or algorithmic logic and cannot be equated with proprietary software or intellectual property.

Tribunal’s Observations

The ITAT found merit in Netflix India’s submissions and rejected the Revenue’s reliance on an artificial characterization of the Indian entity’s operations. The Bench noted that the TPO’s findings were self-contradictory, as they initially acknowledged that Netflix India had no access to the content but later concluded the opposite. “The TPO’s conclusion that Netflix India provides the ‘Netflix Service as a whole, including content,’ is internally inconsistent. To attribute 43% of global subscription revenue to an entity that neither owns nor develops the underlying content or technology is to violate the symmetry between function, asset, and risk — the triad that defines economic ownership,” the Tribunal observed.

The Bench emphasized that the Transactional Net Margin Method (TNMM) adopted by Netflix India — a recognized and accepted method under Indian transfer pricing rules — was appropriate for determining the Arm’s Length Price (ALP) of its international transactions. The Tribunal rejected the Revenue’s attempt to substitute TNMM with a royalty-based approach, terming it “an outcome-driven and perverse appreciation of the record.”

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Holding that Netflix India had correctly applied the TNMM and that the Revenue’s re-characterization lacked factual or legal foundation, the ITAT deleted the entire ₹445 crore transfer pricing adjustment. The ruling reaffirms that limited-risk service providers like Netflix India cannot be treated as owners or licensees of global intellectual property merely by virtue of their operational presence in India. “Such an overreach in characterization distorts the principles of transfer pricing and undermines economic logic,” the Tribunal concluded.

Appearance

For Assessee: Advocates Porus Kaka, Advocate, Divesh Chawla,Harsh Shah

For Revenue: Pankaj Kumar

Cause Title: Netflix Entertainment Services India V. Deputy Commissioner of Income 

Case No: ITA No.6857/Mum/2024

Coram: Amit Shukla (Judicial Member), Renu Jauhri (Accountant Member)