ITAT Mumbai Rejects Revenue’s Re-Characterisation of Netflix India; Deletes ₹445-Crore TP Adjustment

Netflix Entertainment Services India LLP Vs DCIT (ITAT Mumbai) 

ITAT Mumbai Rejects Revenue’s Re-Characterisation of Netflix India; Deletes ₹445-Crore TP Adjustment; No Royalty on Access Distribution — ITAT Mumbai Rules Netflix India Not a Content Provider; Netflix India a Limited-Risk Distributor, Not a Full-Fledged Entrepreneur, Says ITAT Mumbai; ITAT Mumbai: Rule 10AB Misapplied — TNMM Accepted as Correct Method for Netflix India; Tribunal Finds No Evidence of Licence or Technology Use by Netflix India; Quashes TP Adjustment; ITAT Mumbai Applies Engineering Analysis Principle — No Royalty Without Copyright Transfer; ₹445-Crore Transfer Pricing Adjustment Deleted — ITAT Mumbai Upholds Netflix India’s Functional Profile.

Facts:

1. Netflix Entertainment Services India LLP (“Netflix India”) is a subsidiary of the Netflix global group and is engaged in India exclusively in the business of distribution of access to the Netflix online video streaming platform for its Associated Enterprises (AEs). It acts strictly as a limited-risk service provider and performs only routine, low-value functions such as subscriber acquisition and support, marketing assistance, user billing and payment facilitation, and coordination of customer grievance resolution. The assessee has no authority to manage content curation, pricing strategy, technology development, subscriber database management, or business expansion decisions in India. All such material and strategic decisions are fully controlled by the AEs outside India.
2. Throughout the relevant financial year, Netflix India did not carry out any content acquisition or intellectual property development. All copyright-protected content, platform technology, proprietary algorithms (including recommendation engines), user interface systems, trademarks, confidential information, and brand assets are fully owned, controlled, and exploited by foreign AEs. Netflix India neither receives nor is granted any licence or right to reproduce, distribute, modify, adapt, sub-license, or commercially exploit any content or technology. The assessee merely facilitates Indian subscribers’ access to the global Netflix Service and does not engage in any function that results in the creation, enhancement, or protection of intellectual property. Thus, the assessee performs no DEMPE functions.
3. The Netflix platform, playback systems, digital rights management, and subscriber data infrastructure are hosted and controlled outside India by AEs. Even network-level integration using Open Connect Appliances (“OCAs”) deployed at ISP locations in India does not create any technological presence or risk assumption in India. OCAs are only temporary caching devices owned by AEs and deployed purely for bandwidth optimization. They do not process user data, do not store content permanently, and do not involve any technology development, maintenance, or upgrade responsibility on the part of Netflix India.
4. Netflix India is remunerated on a cost-plus basis, earning a routine margin of approximately 36%, which aligns with its risk-insulated economic profile. It does not undertake any market risk, content-popularity risk, piracy risk, revenue fluctuation risk, subscriber churn risk, or pricing risk. Subscription pricing, product launches, promotional offerings, and commercial models are entirely determined by the foreign AEs. Further, subscriber service terms — including access restrictions, rights, and limitations — are contractually established between the AE and subscribers through the Netflix Terms of Use.
5. Up to 31.12.2020, the assessee operated under a distribution arrangement with Netflix International B.V., Netherlands. With effect from 01.01.2021 (revised on 01.03.2021), Netflix US took over as the principal licensor for non-US territories, including India. Notwithstanding the change in counterparty, the scope of rights and role of the assessee remained unchanged, limited to distribution of access without any rights to content or technology.
6. The assessee filed its return of income for AY 2021-22 on 30.11.2021 and reported its international transactions in Form 3CEB. The assessee benchmarked its distribution support functions using the Transactional Net Margin Method (TNMM) as the Most Appropriate Method and demonstrated that its margin fell within the arm’s-length range. The Assessing Officer referred the matter to the TPO under section 92CA(1). The TPO, vide order dated 09.10.2023, rejected the assessee’s characterization and TNMM benchmarking and proceeded to re-characterize the assessee as a provider of content and technology services on the basis of an alleged “implied licence” arising from access distribution and OCA installation. On this unfounded premise, the TPO applied Rule 10AB — Other Method using unrelated royalty-based comparables sourced from commercial databases and proposed a transfer pricing adjustment exceeding Rs. 4,444 crores, treating Indian subscription revenue streams as royalty-bearing consideration.
7. The Dispute Resolution Panel, vide directions dated 28.09.2024, sustained the TPO’s conclusions without addressing the fundamental legal and factual objections raised by the assessee. The Assessing Officer thereafter passed the final assessment order under section 143(3) read with section 144C(13) on 25.10.2024 incorporating the TP adjustment in full. As the Revenue authorities disregarded the actual contractual rights, economic functions performed, and internationally accepted TP principles, the assessee filed an appeal before the Hon’ble ITAT, Mumbai on 05.12.2024.

Issues:

1. Whether the assessee should be characterised as a limited-risk distributor of access or as a content/technology entrepreneur in India.
2. Whether any copyright or technical licence was granted to the assessee so as to classify payments as royalty under the Act / DTAA.
3. Whether TNMM is the appropriate method for benchmarking the international transactions.
4. Whether the rejection of comparables by the TPO and adoption of Rule 10AB – Other Method is justified.
5. Whether the Open Connect Appliances (OCAs) constitute core technology assets resulting in value creation in India.
6. Whether re-characterisation of a genuine contractual arrangement by the Revenue authorities is permissible without evidence of sham.

Observations:

1. The Tribunal examined the contractual arrangement and the actual nature of operations carried out in India and concluded that Netflix Entertainment Services India LLP operates only as a distributor of access to the streaming service in India. It has no ownership of, or control over, the film and series content, the platform technology, software programs, algorithms, user interface, or any other intellectual property which are entirely owned and controlled by foreign Associated Enterprises. The Tribunal observed that Netflix India does not obtain any right to copy, store permanently, distribute, edit or commercially exploit any content, and that Indian users merely receive restricted access for personal viewing.
2. The Tribunal recorded that the Revenue attempted to treat payments made to overseas Associated Enterprises as royalty under Indian tax law by relying on an interpretation that the assessee had a licence to use copyright and technology in India. For this purpose, the Tribunal noted that reliance was placed by the assessee on the judgment of the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021) 432 ITR 471 (SC), 02.03.2021, which held that when no right in copyright is transferred, consideration cannot be treated as royalty. The Tribunal applied this binding legal principle to hold that the Revenue’s royalty theory was not legally sustainable.
3. The Tribunal also considered the claim that Netflix India allegedly engaged in technology operations through Open Connect Appliances placed with internet service providers in India. The Tribunal found that these are merely temporary caching devices used to ensure efficient content delivery, that they do not operate as servers or technology infrastructure belonging to Netflix India, and that the assessee does not perform any technical management or development functions connected to them. This confirmed that Netflix India does not undertake any activity in India that can be characterised as use or exploitation of technology or intellectual property belonging to the Netflix group.
4. The Tribunal held that Netflix India performs only limited functions such as marketing support, customer interface and facilitation of subscription payments, while bearing negligible business risk. Its remuneration on a routine support-services margin basis correctly reflects its role in India. As a result, the Transfer Pricing Officer’s attempt to discard the Transactional Net Margin Method and replace it with a royalty-based model was held to be fundamentally flawed and contrary to the actual functional profile of the assessee.
5. The Tribunal therefore concluded that the transfer pricing adjustment founded on an assumed licence of intellectual property was without basis in fact or law, and directed that the adjustment be deleted in full.