Transfer Pricing and Characterization of an Entity : Netflix Entertainment Services India LLP v. Deputy Commissioner of Income Tax

Brief Background: 

About Netflix –  

Netflix Inc (Netflix USA) operates on a subscription model where users gain access to a curated video-on demand content. There are certain agreements that were entered into by Netflix USA, Netflix International B.V. and Netflix Netherlands. They can be stated as follows: 

The role of Netflix India was contractually confined to distributing access to the “Netflix Service,” defined as a global, internet-streamed video-on-demand service for personal use, with no transfer of content, technology, or other IP rights. Netflix India’s functions were limited to marketing, customer acquisition and support, invoicing/collection, liaising with telecom operators, and routine operational support, earning a low, fixed-margin distribution fee on Indian subscription revenue while its entire cost base was reimbursed. Its assets were only routine tangibles (no intangibles developed or owned), and it bore limited operational/regulatory risk, for which it applied the Transactional Net Margin Method (“TNMM”) with Operational Profit/Operational Revenue as the profit level indicator, positioning itself as a limited-risk distributor. 

The Revenue Authorities recast Netflix India as a full-fledged entrepreneurial content/technology provider rather than a limited-risk distributor, pointing to clauses making it responsible for making the service available in India, marketing and pricing, issuing gift subscriptions and discounts, contracting directly with Indian subscribers, providing customer support, obtaining local licences and infrastructure, and receiving subscription fees in India. On this basis, the Transfer Pricing Officer and Dispute Resolution Panel (“DRP”) treated the model as a complex content-and-technology distribution business akin to media/entertainment providers, contending (i) that there was a transfer or use of intellectual property giving rise to royalty, (ii) that TNMM was not the appropriate method, and (iii) that an “other method” under Rule 10AB, factoring in royalty on content/technology sourced from Netflix US and Netherlands, was the correct approach. 

Decision of Income Tax Appellate Tribunal:  

The ITAT examined the distribution agreement and held that Netflix India never received any licence to use, reproduce, alter, or sub-license Netflix content, and that the DRP had overstated the clauses to wrongly treat it as a content provider. Netflix India held no digital content stock; Open Connect Appliances only cached transient copies for bandwidth optimisation, without customer data, algorithms, playback, or recommendation logic, all of which remained with Netflix entities abroad. The Tribunal accepted the assessee’s FAR analysis, noting that no Netflix India employee handled content acquisition, tech design, or platform development, and rejected the Revenue’s “other method” computation as inconsistent with transfer pricing principles. 

On method selection, the ITAT reiterated that the most appropriate method must be driven by the nature of the controlled transaction and reliable functional comparables, not by generic sectoral labelling such as “media and entertainment.” It endorsed prior rulings treating software distributors as suitable analogues for digital content distributors and held that the “other method” under Rule 10AB is not a licence for ad hoc profit attribution, but must still rest on comparable uncontrolled transactions and be used sparingly. Applying a DEMPE lens, it found all development, enhancement, maintenance, protection, and exploitation of IP occurred in the US/Netherlands, with no such functions in India, and emphasized that Section 92C read with Rule 10B provides an exhaustive transfer pricing framework leaving no room for hybrid methods. Relying on WarnerMedia India¹, Star Den Media Services², and Turner International India³, the ITAT characterized Netflix India as a limited-risk distributor remunerated on a TNMM basis and deleted the entire transfer pricing adjustment. 

Our Thoughts: 

The ITAT ruling prioritizes functional analysis over physical presence, clarifying that infrastructure or personnel alone does not create value and further, technological presence cannot be conflated with economic ownership, offering critical guidance for digital models. Entities claiming entrepreneurial returns must demonstrate substantive Development, Enhancement, Maintenance, Protection, and Exploitation of intangible assets functions (also known as DEMPE functions), as routine marketing and compliance activities fall short. Rule 10AB’s “Other Method” cannot override viable traditional approaches and requires functionally comparable uncontrolled transactions, rejecting arbitrary profit grids. Origin Cache Appliances and similar tools serve purely logistical roles akin to warehousing, not core asset ownership for streaming operations while full cost-plus-fixed-markup structures confirm limited-risk profiles despite ancillary duties. Functional comparability extends across industries, enabling analogous benchmarks when direct comparables are unavailable.

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause. 

1. 167 taxmann 307 ↩︎
2. 118 taxmann 662  ↩︎
3. 95 taxmann 285 ↩︎