Netflix India Succeeds as ITAT Rejects Royalty Re-characterisation and Upholds TNMM for Digital Distributors; Routine Functions Do Not Result in IP Creation

Netflix Entertainment Services India LLP vs. DCIT | Mumbai ITAT | IT APPEAL NO. 6857 | AY 2021-22

Netflix Entertainment Services India LLP (“Netflix India”) operates as the Indian distributor providing access to the global Netflix platform. Its role is limited to marketing support, subscriber billing and collections, customer support coordination and regulatory compliance. All key intangibles—content library, algorithms, platform technology, trademarks—and all platform development/maintenance activities are undertaken entirely by the overseas Associated Enterprises (Netflix US / NIBV).

Netflix India remitted a distribution fee to its foreign AEs, retaining a fixed return on sales of 1.36%, consistent with its limited-risk profile.

For AY 2021–22, the TPO rejected this characterization and re-cast Netflix India as the principal content and technology service provider, resulting in a royalty-based TP adjustment of INR 444.93 crores. DRP substantially upheld this view. Netflix India appealed before the ITAT.

1. Core Issues Examined

Whether Netflix India functioned as a limited-risk distributor or a full-fledged content/technology player.

Whether any rights or licence in content or platform technology were granted, warranting royalty treatment.

Whether OCAs created local intangibles or were merely cache devices for network efficiency.

Whether TNMM remained the appropriate method versus the TPO’s royalty-based “Other Method.”

2. Tribunal’s Key Observations and Findings

Limited-Risk Profile Confirmed: Netflix India performs only routine promotional, billing, customer support coordination and regulatory compliance functions. It does not develop, enhance, maintain, protect, or exploit any IP.

No DEMPE Functions or Valuable Intangibles in India: All content and technology development, enhancement, platform maintenance and IP protection occur entirely offshore. OCAs are cache devices with no processing or content-creation capability.

No Rights or Licence in Content or Platform Technology: There is no evidence of Netflix India acquiring or exploiting any intellectual property; it merely facilitates access to an online service.

Risk Insulation is Complete: Costs are reimbursed; returns are fixed; all entrepreneurial, content, service liability, market and investment risks lie with foreign AEs.

TPO’s Re-Characterization is Unsustainable: The TPO’s interpretation of contractual clauses was selective and contradictory. The conclusion that Netflix India licensed content/technology was inconsistent with the factual record.

TNMM is the Appropriate Method: Netflix India’s benchmarking under TNMM using software/product distribution comparables complied with Rule 10B(1)(e) and OECD guidance. Adjusted comparable margins (-0.48% to +0.32%) comfortably covered Netflix India’s 1.36% margin.

Royalty-Based Attribution is Invalid: The TPO/DRP’s 57.12% royalty model was based on non-comparable third-party agreements with no linkage to Netflix India’s actual FAR profile. “Other Method” lacked quantitative foundation and violated arm’s-length principles.

Accordingly, the ITAT deleted the entire transfer pricing adjustment (~INR 445 crores) and accepted the TNMM analysis.

3. Key Takeaways / Implications

Functional recharacterization must be based on actual conduct and evidence—not assumptions or selective reading of contractual clauses.

Mere technological presence (servers, cache devices, network gear) does not create local value-creation rights or justify royalty-based attribution.

TNMM continues to be the most practical and reliable method for routine digital distributors and market-facing support entities, particularly where no IP is owned/controlled in India.

DEMPE and risk allocation analysis remains central to transfer pricing outcomes for digital economy businesses.

Taxpayers must ensure contracts, FAR analysis and actual conduct are synchronised and periodically updated.

This ruling is a strong affirmation that transfer pricing must follow economic substance, not speculative interpretations of digital operations. For multinational digital and technology businesses, it reinforces that routine marketing/distribution entities cannot be transformed into IP-rich entrepreneurs without concrete evidence of DEMPE functions or value-creating assets in India. As scrutiny over digital business models intensifies, corporates should proactively ensure that FAR profiles, inter-company agreements and TP policies accurately reflect their operational realities—a critical defence against aggressive recharacterization.

https://www.vchandassociates.in/netflix-india-succeeds-as-itat-rejects-royalty-re-characterisation-and-upholds-tnmm-for-digital-distributors-routine-functions-do-not-result-in-ip-creation/