Authors:
India’s tax authorities sought to recharacterize Netflix Entertainment Services India LLP (Netflix India) from a limited-risk distributor into an entrepreneurial provider of content and technology.
Netflix India earned reimbursement of costs plus 1.36% of its revenues as remuneration on its distribution function. The tax office made an addition of over INR 4 billion. The Transfer Pricing Officer (TPO) attributed 57.12% of revenues to India, based on royalty benchmarks, which was later revised by the Dispute Resolution Panel (DRP) to 43% through an arbitrary allocation grid[1].
The Tribunal, however, delivered a meticulously analysed and decisive verdict in favor of Netflix India, dismantling the Revenue’s assumptions with what it called “granular precision.” It concluded that the tax office’s assumption that Netflix India held a content/technology licence existed neither in contract nor in conduct.[2]
The Tribunal’s verdict was founded on the following conclusions it reached:
- Contracts Speak Louder Than Assumptions: The Tribunal found no contractual or factual evidence of any licence for content or technology. Netflix India merely facilitated access; all IP rights remained offshore
- Open Connect Appliances (OCAs) are Logistical assets Not IP: Revenue claimed OCAs made Netflix India a tech entrepreneur. The Tribunal disagreed and observed “This inference confuses operational indispensability with economic entrepreneurship.” OCAs were likened to warehouses which are necessary for delivery, but not value creators.
- DEMPE Analysis – Development, Enhancement, Maintenance, Protection, and Exploitation of intangibles were all performed offshore. India performed no DEMPE functions beyond routine compliance.
- Human Capital Reality: The Tribunal noted the employee profile and observed that majority of the employees focused on marketing and not content creation or technology development. The Tribunal also noted that Netflix had only 64 employees in India versus 9,400 globally.
- Risk Profile & Assets: The Tribunal noted that the gap between the assets of Netflix US and India was almost 4000 times, and that Netflix India had no “content assets”. Content assets comprised the predominant share of the asset base of Netflix US.
The Tribunal called out the tax office for conflating “facilitation with creation, logistics with technology, and compliance with entrepreneurship[3].” It reinstated affirmed the characterisation of Netflix India as a distributor, reaffirmed TNMM as the correct method and deleted the adjustment.
Analysis:
The core controversy revolved around the functional characterization of Netflix Entertainment Services India LLP. The tax authorities asserted that Netflix India was not a mere limited-risk distributor but an entrepreneurial operator of content and technology in India.
Netflix India earned an arm’s length return of 1.36% on sales on its routine distribution function. The tax office used royalty agreements as benchmarks and instead attributed 57.12% of revenues as attributable to India. The Dispute Resolution Panel replaced this with an attribution table assigning arbitrary percentages to multiple functions (content storage 5%, Content Delivery Network + ISP 2%, infrastructure 5%, customer agreements 2%, marketing 5%, technology 5%, etc.) and ultimately concluded that 43 percent of total revenue should be attributed to Netflix India.
The Tribunal started by delineating the actual contractual framework, the functions, assets and risks (FAR) borne by each entity, and then, in its own words, tested ‘with granular precision’[4], the validity of the findings. The tax office relied upon certain clauses to assert that Netflix India bears greater risk, decides pricing, enters contracts on its own account, and licenses or procures the service for distribution. The Tribunal analysed the clauses and concluded that a contextual reading of the same refutes the tax office’s allegation[5].
The Dispute Resolution Panel had numerated fifteen “high-value functions” ranging from content storage and digital stock maintenance to ISP negotiations and regulatory approvals.
The Tribunal concluded that the DRP’s observations were contradicted by the record and exceeded the contractual remit[6].
A key factor in the characterisation dispute was the Open Connect Appliances (OCAs) owned by Netflix India. The Revenue argued that the OCAs store and deliver content to Indian subscribers, forming an integral part of the content delivery network. Without these OCAs, Netflix’s global content library could not be streamed efficiently within India. The tax office argued that by owning and maintaining these devices, Netflix India assumes not only investment risk, but also technological and operational risks typically borne by an entrepreneur rather than a limited-risk distributor. The Tribunal analysed the functions performed by Netflix India vis-a-vis the OCAs[7] and concluded that the “inference confuses operational indispensability with economic entrepreneurship.” The Tribunal observed that every distribution network requires infrastructure at the destination market and such necessity does not, by itself, confer profit-entitlement or risk ownership. The Tribunal accepted Netflix India’s contention that the functions of the OCAs were logistical.
The Tribunal also noted that the employee profile of Netflix India reinforced its characterisation. The Indian entity’s workforce of about sixty professionals performed marketing support, operations coordination, finance, and compliance. The Tribunal noted that none of the employees are engaged in content acquisition, technology design, or platform development, and concluded that the human-capital matrix negated the Revenue’s portrayal of a technology or content entrepreneur.
The Tribunal also observed that asset data corroborate this conclusion: Netflix India’s total assets were approximately ₹ 75 crores (approx. USD 1 million then), while Netflix US’ assets exceed USD 3.9 billion – about 4,000 times larger. The Tribunal noted that content assets formed the predominant share of Netflix’s global balance sheet and that Netflix India held none.
The Tribunal noted that Risk allocation, too, confirmed the limited-risk profile. All critical entrepreneurial risks market, investment, service liability, technological obsolescence are borne by the AEs. Netflix India’s costs were reimbursed, and it earned a 1.36 percent Return on Sales, insulating it from losses. Such arrangements, akin to cost-plus contracts, negated any entrepreneurial exposure.
As stated earlier, the Tribunal noted that the tax office had “conflated facilitation with creation, logistics with technology, and compliance with entrepreneurship” and ruled in favour of the taxpayer.
As regards the methodology for determining the arm’s length price, the Court relied on OECD Guidance and other Tribunal rulings[8] to accept the lateral comparables arrived at by using the TNMM.
OECD and the ruling:
The ruling contains references to the 2022 OECD Transfer Pricing Guidelines. While accepting the taxpayer’s TNMM, the Court noted that Rule 10B(2) of the Income-tax Rules, 1962 and OECD Guidelines (2.59) accord primacy to functional comparability where product or market comparables are unavailable. While rejecting the other method the court noted that the OECD Transfer Pricing Guidelines 2022 (Para 2.149) caution that “Other Methods” should be invoked sparingly and only where they yield a higher degree of reliability than the established methods[9]. The Court had also observed “that from a jurisprudential standpoint, the TPO’s and DRP’s methodologies also offend the arm’s-length principle codified in Article 9 of the OECD Model and accepted by Indian law”[10].
The Tribunal noted that the DEMPE analysis (Development, Enhancement, Maintenance, Protection, Exploitation) further dismantled the Revenue’s case. The Tribunal stated that the record shows: “(a) All Development and Enhancement of technology, algorithms, and user interface occur within Netflix US’ engineering teams; (b) Maintenance of the platform, bug fixes, and feature roll-outs are executed centrally; (c) Protection of IP, including registration of trademarks and enforcement of copyright, is undertaken by NIBV and Netflix US; (d) Exploitation through global licensing and monetisation remains wholly offshore. In India, no DEMPE function save routine regulatory facilitation is performed.” Interestingly, DEMPE as a concept is not enshrined in Indian transfer pricing law.
It is noteworthy that in the 2025 update to the OECD Model Convention[11], India has taken a position that “as regards paragraph 1 of the Commentary on Article 9[12], India has not agreed to the OECD Transfer Pricing Guidelines and hence reserves the right to deviate from them in accordance with the provisions in its domestic laws.”
In its Engineering Analysis[13] ruling, the Hon’ble Supreme Court had stated that it was significant to note that after India took positions qua the OECD Commentary on royalties, no bilateral amendment was made by India to change the definition of royalties[14]. The Court observed that it was thus clear that the OECD Commentary on Article 12 of the OECD Model Tax Convention will continue to have persuasive value as to the interpretation of the term “royalties” contained therein[15]. The Hon’ble Supreme Court also affirmed[16] the view taken by the Hon’ble Delhi High Court in the case of New Skies Satellite[17]. The Delhi High Court had held mere positions taken with respect to the OECD Commentary do not alter the DTAA’s provisions, unless it is actually amended by way of bilateral re-negotiation.
The effect of the 2025 positions taken by India on its existing treaties, would need to be viewed in light of the Supreme’s Court’s observations.
Conclusion:
The significance of the Netflix ruling is amplified by the trajectory of India’s OTT sector, which is projected to surge from USD 4.5 billion in 2025 to USD 19.25 billion by 2035, reflecting a CAGR of 15.6%[18]. This exponential growth positions India as one of the most dynamic digital entertainment markets globally, making transfer pricing disputes over intangibles and digital infrastructure increasingly consequential.
The Tribunal’s decision provides a critical precedent for delineating functions and applying DEMPE principles in a sector where value creation is heavily IP-driven yet operational footprints are localized.
By clarifying that logistical assets such as Open Connect Appliances do not equate to intangible ownership and that routine distribution functions warrant cost-plus remuneration, the ruling sets a jurisprudential benchmark for future controversies in a market expected to quadruple in size over the next decade.
The Tribunal’s ruling deserves high commendation for the meticulous and structured manner in which it has analysed the complex issues at hand. The order reflects an exceptional depth of reasoning, beginning with a granular examination of the contractual framework and the FAR (Functions, Assets, Risks) profile, and proceeding to a rigorous evaluation of the benchmarking methodology under Rule 10B and Rule 10AB. The Bench has not only dissected the TPO’s and DRP’s findings with precision but also anchored its conclusions in settled jurisprudence and OECD principles, ensuring clarity and consistency in the application of law. By systematically addressing each contention – whether relating to functional characterisation, DEMPE analysis, or the validity of the “Other Method”, the Tribunal has set a benchmark for analytical integrity and judicial discipline in transfer pricing adjudication. This ruling potentially provides a footprint of how the judiciary, tax authorities and multinationals can navigate the intersection of technology, intangibles, and transfer pricing compliance.
[1] The Dispute Resolution Panel came up with an attribution table assigning arbitrary percentages to multiple functions (content storage 5%, Content Delivery Network + ISP 2%, infrastructure 5%, customer agreements 2%, marketing 5%, technology 5%, etc.) and ultimately concluded that 43 percent of total revenue should be attributed to Netflix India.
[2] Para 94 of the ruling.
[3] Para 120 of the ruling.
[4] Para 82 of the ruling.
[5] Para 86 of the ruling:
“The TPO relied upon certain clauses particularly 4.1(b), (d), (e), (g), (h), (l) and (m) to assert that Netflix India bears greater risk, decides pricing, enters contracts on its own account, and licenses or procures the service for distribution . A contextual reading refutes this. Clause 4.1(b) merely allows the Indian entity to provide services to Indian subscribers on its own accountability in respect of billing and customer-service obligations; it does not allocate ownership or economic risk of the service. Clause 4.1(d) obliges Netflix India to make the service available, meaning to facilitate access, not to supply or license the content. Clause 4.1(e) empowers the assessee to issue gift subscriptions or discounts, yet expressly “within guidelines approved by the AEs”; this denotes tactical flexibility, not pricing strategy. • Clause 4.1(g) stipulates entry into user agreements “as per its own terms and conditions,” but the preamble clarifies that such Terms of Use are standard global templates, not independently authored. Clause 4.1(l) on customer support and Clause 4.1(m) on regulatory approvals relate to routine distributor obligations compliance, billing, grievance redressal and not to any creation or exploitation of IP.”
[6] Para 87 of the ruling.
[7] Para 88 of the ruling: “The evidence on record unchallenged before us shows that Open Connect Appliances (OCAs) are cache devices placed at ISP nodes to store temporary copies of data for bandwidth optimisation. They: • contain no customer data, • perform no algorithmic processing, and • execute no playback or recommendation logic. All such functions are operated by Netflix US via software owned and hosted on AWS servers outside India . 89. The OCAs therefore act as mirror caches, analogous to logistical warehousing in physical distribution. Their local presence facilitates delivery efficiency, not value creation. The TPO‟s and DRP‟s characterisation of these caches as “critical technological assets implying entrepreneurial risk” proceeds on a misunderstanding: storage for bandwidth efficiency is not technological development or ownership.”
[8] At Para 102, the Tribunal observed: “Consistently, this Tribunal in various cases viz., Turner International India (P.) Ltd. (95 taxmann.com 285, Delhi Trib.), Star Den Media Services Pvt. Ltd. (118 ITA No. 6857/Mum/2024 Netflix Entertainment Services India LLP 49 taxmann.com 662, Mumbai Trib.), Sony Pictures Networks India Pvt. Ltd. (126 taxmann.com 330, Mumbai Trib.), and Warnermedia India (P.) Ltd. (167 taxmann.com 307, Delhi HC) affirmed that software distributors are valid analogues for media-content distributors in the absence of direct comparables” .
[9] Para 106 of the ruling.
[10] Para 133 of the ruling.
[11] https://www.oecd.org/content/dam/oecd/en/publications/reports/2025/11/the-2025-update-to-the-oecd-model-tax-convention_c7031e1b/5798080f-en.pdf
[12] Para 1 of the Commentary to Article 9 reads as under : “This Article deals with adjustments to profits that may be made for tax purposes where transactions have been entered into between associated enterprises (parent and subsidiary companies and companies under common control) on under conditions that are not other than arm’s length terms. The Committee has spent considerable time and effort (and continues to do so) examining the conditions for the application of this Article, its consequences and the various methodologies which may be applied to adjust profits where transactions have been entered into on under conditions that are not arm’s length terms. Its conclusions are set out in the report entitled Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, (the “OECD Transfer Pricing Guidelines”), which is periodically updated to reflect the progress of the work of the Committee in this area. That report represents internationally agreed principles and provides guidelines for the application of the arm’s length principle of which the Article is the authoritative statement.”
[13] Engineering Analysis Centre of Excellence (P.) Ltd . vs. Commissioner of Income-tax [2021] 125 taxmann.com 42 (SC)/[2021] 281 Taxman 19 (SC)/[2021] 432 ITR 471 (SC)[02-03-2021]
[14] Para 156 of the Engineering Analysis ruling.
[15] Para 158 of the Engineering Analysis ruling.
[16] Para 155 of the Engineering Analysis ruling.
[17] DIT v. New Skies Satellite BV [2016] 68 taxmann.com 8/28 Taxman 577/382 ITR 114 (Delhi)
[18] https://www.marketresearchfuture.com/reports/india-ott-market-12696
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