ITAT rejects ₹445 crore transfer pricing adjustment against Netflix India; holds it a limited-risk distributor, not content provider

In a significant ruling for digital and streaming multinationals, the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has rejected the Revenue’s recharacterisation of Netflix Entertainment Services India LLP as a full-fledged entrepreneur or content provider and deleted a transfer pricing adjustment of ₹444.93 crore for Assessment Year 2021–22.

The ITAT Bench comprising Amit Shukla (Judicial Member) and Renu Jauhri (Accountant Member) held that Netflix India operates as a limited-risk distributor of access to the Netflix streaming service and not as an entrepreneurial content-and-technology service provider bearing significant business risks.

Key issue before the Tribunal

The central question before the Tribunal was whether the Indian entity functions merely as a limited-risk distributor or as an entrepreneurial content-and-technology service provider that owns or develops valuable intangibles and is thus entitled or liable to commensurate profits under the arm’s-length principle.

Findings and observations

Examining the Distribution Agreement between Netflix India and its Associated Enterprises (AEs), the Tribunal observed that the Transfer Pricing Officer’s (TPO) inference was “internally inconsistent.”

“The very paragraph quoted by the TPO begins by recognising that Netflix India ‘does not get access to content’ yet ends by concluding that it does. Such self-contradiction, as the assessee rightly argued, betrays a perverse appreciation of record and an outcome-driven approach,” the Bench stated.

On a detailed Functions-Assets-Risks (FAR) analysis, the Tribunal accepted the assessee’s submission that:

• Its functions are limited to promotion, marketing, invoicing, local customer support, and regulatory compliance;


• Its tangible assets include office premises and IT equipment;


• It owns no intangible assets;


• Its risks are confined to routine operational exposures fully indemnified by AEs; and


• It earns a Return on Sales (ROS) of 1.36% on a fully cost-insulated basis—consistent with a low-risk distributor profile.

The Tribunal also noted that Netflix India’s employees are not involved in content acquisition, technology design, or platform development, but perform routine marketing and operations coordination functions.

Rejection of Revenue’s ‘hybrid royalty’ approach

The ITAT upheld the Transactional Net Margin Method (TNMM) adopted by Netflix India as the most appropriate method for benchmarking its international transactions, rejecting the TPO’s “hybrid royalty construct” under the “other method.”

"The TPO’s hybrid royalty construct reduces reliability by introducing incomparable property rights and by ignoring actual tested-party data,” the order stated.

Further, the Tribunal found that the Revenue’s claim that Netflix India “obtains content and technology on licence” was inconsistent with its own finding that the entity “does not get access to content.”

Emphasis on functional and economic reality

Holding that Netflix India performs routine distribution and marketing-support functions under close supervision of its AEs, the Tribunal concluded that the entity owns no valuable intangibles, performs no DEMPE functions, and its profitability benchmark under TNMM reflects an arm’s-length outcome.

In a strong remark on the Revenue’s approach, the Tribunal observed that “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.”

Representation

The assessee was represented by Senior Advocate Porus Kaka, along with Advocates Divesh Chawla and Harsh Shah, and Chartered Accountants Karishma R. Phatarphekar and Rohan Vesuna. The Revenue was represented by CIT-DR Pankaj Kumar.

Expert speak: Strengthening commercial substance in TP jurisprudence

Commenting on the ruling, Manish Garg, Lead – Transfer Pricing and Litigation, AKM Global, a tax and consulting firm, said that “The recent ruling of the Mumbai ITAT in Netflix Entertainment Services India LLP sets a strong precedent in transfer pricing considerations for OTT multinationals. The Tribunal’s decision strengthens investor confidence by reaffirming that a mere technological or operational presence does not translate into value creation. It underscores that genuine commercial arrangements must be respected, and tax authorities should rely on realistic comparables rather than hypothetical assumptions."

Garg also shared that by dismissing the Revenue’s attempt to recharacterize Netflix India as a full-fledged content and technology entrepreneur, the ITAT has reiterated a fundamental concept of transfer pricing — taxation must follow economic substance and contractual reality, not conjecture.

"The decision makes it clear that hosting infrastructure or facilitating user access cannot, by itself, constitute ownership of intellectual property or performance of value-creating functions," Garg said.

"Importantly, the ruling provides reassurance to multinational digital and OTT players operating under cost-plus or limited-risk models. It confirms that, in the absence of DEMPE functions or risk control, legitimate distribution or support arrangements will not be reclassified into entrepreneurial roles," Garg explained.

The ITAT also drew attention to the mechanical approach often adopted by transfer pricing officers, noting several internal inconsistencies in the TPO’s analysis and emphasizing the need for fact-based evaluations., Garg added.

Simply put, Garg said that "Overall, the judgment is a defining moment for India’s transfer pricing regime in the digital economy. It clearly signals that alignment with commercial substance, rather than theoretical attribution, will remain the cornerstone of India’s transfer pricing jurisprudence.”

Broader implications

Tax practitioners believe this ruling will influence future disputes involving digital, OTT, and e-commerce multinationals operating in India through limited-risk or support service models, as it reinforces that transfer pricing outcomes must align with contractual and economic substance rather than presumptive value attribution.Read about our editorial guidelines and ethics policy