Transfer Pricing Updates

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Transfer Pricing Updates

Important Transfer Pricing Updates and Judicial Rulings

CBDT released seventh Annual Report on the APA Programme for FY2024-25 (FY2425)

The Central Board of Direct Taxes (‘CBDT’) has released its Seventh Annual Report on the Advance Pricing Agreement (‘APA’) Programme, highlighting significant progress achieved during FY2024-25.

In general, the APA arrangements provide upfront certainty on transfer pricing methodologies for international transactions, thereby reducing litigation risk and avoiding prolonged transfer pricing disputes. And depending on business circumstances, taxpayers may enter into a Unilateral APA (‘UAPA’), Bilateral APA (‘BAPA’), or Multilateral APA (‘MAPA’).

Below is a snapshot of some of the key highlights of the Annual Report:

This record-setting year reflects India’s strong commitment to a stable and transparent tax environment and encourages multinational enterprises to operate with greater confidence.

Further, an early evaluation of APA suitability and timely filing of APA applications can materially enhance tax certainty outcomes for the businesses.

Hon’ble Mumbai ITAT Rules Netflix India to be a Limited-Risk Distributor and deletes INR 444.95 crore Transfer Pricing Adjustment

In recent ruling, Mumbai Income Tax Appellate Tribunal (‘ITAT’) in the case of Netflix Entertainment Services India LLP [ITAT-6857-Mum-2024], have characterized Netflix India as a limited-risk distributor and accepted the transfer pricing analysis carried out by the taxpayer.

As part of the assessment proceedings, the Transfer Pricing Officer (‘TPO’), and subsequently the Dispute Resolution Panel (‘DRP’), had embarked upon a recharacterization exercise, asserting that Netflix India holds significant entrepreneurial, regulatory, and operational risks, and was in effect not a mere distributor but the principal service provider of the Netflix content and platform in India.

Accordingly, the TPO rejected the Transactional Net Margin Method (‘TNMM’) and applied the “Other Method” as the Most Appropriate Method (‘MAM’) under Rule 10AB. In doing so, the TPO determined an arm’s length royalty rate of 57.12% of Netflix India’s revenue as allowable, instead of permitting the payment of the entire amount as a distribution fee to the overseas associated enterprise.

Upon a detailed examination of the contractual arrangements and the Functions, Assets, and Risks (‘FAR’) profile of Netflix India, the Hon’ble ITAT concluded that Netflix India operated as a routine distributor, entitled to a routine return of 1.36% on sales. The Tribunal observed that Netflix India neither exploited nor created any Intellectual Property (‘IP’), nor was it involved in DEMPE functions (Development, Enhancement, Maintenance, Protection, and Exploitation). Further, the ownership of certain specialised equipment was held to be purely logistical in nature, not indicative of economic ownership or value creation.

Accordingly, the Hon’ble ITAT rejected the application of the “Other Method” observing that TNMM was workable and appropriate, and that the royalty-based benchmarking relied by TPO on non-comparable and hypothetical constructs was not aligned with the market realities.

This judgement reinforces the importance of alignment of contractual arrangements, FAR profile and characterization, and especially in case of new age technology businesses.

Hon’ble Mumbai Tax Tribunal Upholds At-Cost Pricing for Specialized Technical Services in Oil and Gas Industry:

In the recent case of Shell India Markets Private Limited (ITA No. 4828/Mum/2024, AY 2020-21), the Mumbai ITAT among other issues, examined the transfer pricing adjustment proposed in Assessee’s at-cost remuneration model for rendition of upstream technical services under the Production Sharing Contract (‘PSC’).

The Tribunal deleted the entire adjustment and by observing that such at-cost pricing was an industry norm dictated by regulatory and commercial compulsions, consistently followed by all consortium members of the PSC, and also validated by independent expert opinion, and accepted by the Revenue in earlier years, and that transfer pricing provisions do not permit recasting or restructuring of legitimate commercial arrangements.

This ruling reinforces the principle that transfer pricing outcomes must align with industry practices, functional profiles, and the applicable regulatory framework, particularly in highly regulated sectors such as oil and gas, where at-cost remuneration models are mandated under PSCs.

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