Netflix wins key transfer-pricing battle; ITAT sets clear benchmark for MNCs on LRD classification

The tax department had argued that the company functioned as a “full-fledged business” in India

A wide spectrum of multinational corporations — from OTT platforms and luxury fashion houses to auto component makers and SaaS firms — stand to gain from a favourable transfer-pricing ruling secured by Netflix India last month.

The Income Tax Appellate Tribunal (ITAT), Mumbai, on October 17 set aside a Rs 445-crore transfer pricing adjustment imposed on Netflix India. The tax department had argued that the company functioned as a “full-fledged business” in India, creating and owning its content value chain and assuming entrepreneurial risks. Netflix India countered that it operated as a Limited-Risk Distributor (LRD), under which only a minimal, steady margin is taxed locally.

Under transfer-pricing rules, a full-fledged entrepreneur must attribute a larger share of global profits to India, while LRDs — whose margins are contractually assured and who bear no inventory or market risks — face limited tax exposure.

Why it matters

Transfer pricing refers to the price at which different arms of a multinational group transact with each other when goods, services or intellectual property move across borders. Since these internal prices determine how much profit is booked in each country, they directly influence the tax outgo of MNCs. Disputes typically arise when tax authorities believe profits have been shifted out of India through low pricing of intra-group transactions or by classifying an Indian entity as a low-risk distributor rather than an entrepreneur. This often leads to large tax adjustments and prolonged litigation.

“This verdict is important because it draws a clear boundary on the Revenue’s ability to re-characterise low-risk entities as full-fledged entrepreneurs or licensors of technology and content,” said Ankita Singh, founder of Sarvaank Associates. “It underscores that factual, functional and contractual analysis — not notional allocation — must drive transfer-pricing outcomes.”

Several global companies in luxury retail, content businesses, SaaS, FMCG, electronics and high-end auto operate on the LRD model. In this structure, the global parent owns intellectual property, makes investments, and manufactures or creates the goods or services, while the Indian arm acts purely as a distributor or service provider.

“LRDs are present across FMCG, electronics, clothing, confectionery and other sectors. The Netflix ruling will certainly benefit all LRDs in terms of the method for transfer-pricing analysis and the sanctity of distribution agreements,” said Tushar Jarwal, partner at DMD Advocates.

Experts said the ruling also strengthens the position that distribution fees cannot be treated as royalty unless rights in technology or content are transferred. “The Tribunal’s well-reasoned decision reinforces that there is no transfer of rights and, therefore, distribution fees cannot be equated with royalty,” noted Jay Bhansali, advocate at the Bombay High Court.

Transfer pricing remains one of the most litigated areas in direct tax, with disputes often spanning years.

“Transfer pricing is a critical challenge for MNCs, and with India’s growing weight in the global economy, this ruling provides much-needed clarity on characterising entities as LRDs,” said Ankit Jain, partner at Ved Jain & Associates. “It reassures MNCs that genuine distribution arrangements will not be reclassified as entrepreneurial functions requiring significantly higher profit attribution.”