In a significant victory for Netflix Entertainment Services India LLP, the Income Tax Appellate Tribunal (ITAT), Mumbai, has dismissed a Rs 445-crore tax demand raised by the Income Tax Department for the AY 2021-22. The Tribunal ruled that Netflix India operates merely as a limited-risk distributor of the global streaming platform, not as a full-fledged content or technology provider as alleged by the department.
A division bench comprising Amit Shukla and Renu Jauhri held that Netflix India's functions are restricted to marketing, promotion, distribution of access, local customer support, invoicing, and regulatory compliance, and that it neither owns nor develops any content or technology.
Tax Department's Position Rejected
The Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) had earlier alleged that Netflix India should be treated as an "entrepreneurial content and technology service provider," attributing 43% of global subscription revenue to the Indian entity. However, the Tribunal found the department's arguments "internally inconsistent and outcome-driven."
The ITAT noted that the very paragraph cited by the TPO acknowledged Netflix India's lack of access to content, yet concluded otherwise-calling it a "perverse appreciation of record."
Tribunal's Observations
The Tribunal emphasized that:
- Netflix India holds no intangible assets and all operational risks are indemnified by its associated enterprises (AEs).
- Its employees do not engage in content acquisition, technology design, or platform development.
- The company's return on sales (ROS) of 1.36% aligns with its low-risk, cost-insulated profile under the Transactional Net Margin Method (TNMM).
ITAT further held that attributing substantial global revenue to an entity performing only support functions "violates the symmetry between function, asset, and risk - the triad that defines economic ownership."
Final Verdict
The ITAT concluded that Netflix India's operations are limited to routine distribution and marketing support, and it performs no DEMPE (Development, Enhancement, Maintenance, Protection, and Exploitation) functions relating to intangibles. Accordingly, the Tribunal deleted the Rs 445 crore transfer pricing adjustment in full, ruling in favour of the assessee.
The decision marks a major precedent in transfer pricing jurisprudence, reinforcing that subsidiaries providing routine support functions cannot be treated as profit-generating entrepreneurial entities.
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