Netflix Entertainment Services India LLP Vs DCIT (ITAT Mumbai)
Conclusion: Since Netflix India functioned solely as a limited-risk distributor of access, not as a licensee of content or technology, therfore, TNMM benchmarking was accepted, and the royalty-based TP adjustment of ₹444.93 crores was unsustainable.
Held: Netflix Inc. (“Netflix US”), a US-based global streaming company, licenses its non-US operations to Netflix International B.V. (NIBV), Netherlands. In India, Netflix Entertainment Services India LLP (“Netflix India”) was incorporated to distribute access to the global Netflix Service. Under the Distribution Agreement (initially with NIBV and later directly with Netflix US), Netflix India was appointed as a non-exclusive distributor of access to the Netflix Service in India. Netflix India only marketed, invoiced, and collected subscription fees from Indian subscribers and remitted distribution fees to its AEs on a cost-plus fixed return basis. It owned no content, IP, or technology; all streaming infrastructure and content ownership remained with the foreign AEs. Its risk profile was minimal, consistent with that of a limited-risk distributor. For benchmarking the distribution fee, Netflix India applied the Transactional Net Margin Method (TNMM) with OP/OR as the Profit Level Indicator, selecting software distributors as comparables. Its 1.36% margin fell within the arm’s-length range. Revenue contend that Netflix India performed complex, entrepreneurial functions—marketing, customer support, infrastructure (OCAs), and pricing control. Netflix India effectively operated the Netflix Service in India and should be viewed as a content and technology licensee. TNMM inapplicable; adopted “Other Method” under Rule 10AB using external royalty rates (57.12% of revenue). Proposed TP adjustment: ₹444.93 crores. It was held that Netflix India does not acquire or exploit any IP or technology; it only facilitates distribution of access to Netflix’s global streaming service. The Open Connect Appliances (OCA) were supportive cache devices, not core technology assets; no DEMPE functions performed in India. TPO/DRP’s recharacterization disregarded actual contracts and overstepped the statutory framework under section 92C. TNMM remainedthe most appropriate method for routine distribution functions; “Other Method” based on royalty comparables was untenable. The alleged royalty component was imaginary; payment to AEs was not “royalty” under section 9(1)(vi) or tax treaties.
