Copyright thehindubusinessline
Income Tax Appellate Tribunal (ITAT) has turned down Income Tax Department’s re-characterisation of Netflix Entertainment Services India as full-fledged entrepreneur or content-provider. The quasi-judicial body also deleted the adjustment of over ₹445 crore. Experts term this ruling as ‘defining moment for transfer pricing regime in the digital economy.’ “The re-characterisation of Netflix India as a full-fledged entrepreneur or content-provider is held to be contrary to record and law,” the Mumbai bench of ITAT said in an order pronounced on October 17. Also, the entire transfer-pricing adjustment of around ₹445 crore was deleted. “The ALP (arm’s-length price) determined by the assessee under TNMM (transactional net margin method) stands accepted,” it said. Fundamental divergence According to the bench, the present controversy arises out of a fundamental divergence between the assessee’s (Netflix India) declared characterisation of its role and the revenue’s (Income Tax Department) re-characterisation of the same. At the heart of the matter lies the question whether Netflix Entertainment Services India functions merely as a limited-risk distributor of access to the Netflix Service, or whether, as alleged by the transfer pricing officer affirmed by the dispute resolution panel, it operates as an entrepreneurial content-and-technology service provider, bearing significant risks and entitled or liable to commensurate remuneration under the arm’s-length principle. The bench noted that in the realm of digital economy, tribunals worldwide have consistently held that entities engaged in marketing, promotion and distribution of access to global OTT platforms are to be characterised as limited-risk distributors remunerated on a cost-plus or TNMM basis. None has endorsed a royalty-based attribution absent local IP ownership. “We find that Netflix India’s FAR profile, asset composition, risk insulation, and contractual obligations unequivocally categorise it as a limited-risk distributor. Its selection of TNMM as the most appropriate method is legally correct and economically justified,” it said while adding that the ‘other method’ and the DRP’s attribution model are unsustainable in law and fact. Transfer-pricing The bench also noted with concern the increasing tendency of transfer-pricing officers to conflate technological presence with economic ownership. The mere existence of servers, caches, or support personnel in a jurisdiction cannot by itself confer value-creation status. “Unless an Indian entity controls, develops or exploits the underlying intangible assets, its remuneration cannot exceed a routine distributor’s return. This principle, though trite, appears to have been forgotten in the instant case,” the bench said. According to Manish Garg, Lead - Transfer Pricing and Litigation, AKM Global, 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. 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,” he said. Published on October 29, 2025
