UAE domain registrar's income from registration, web hosting, and sponsorship not taxable in India under DTAA

ITAT Mumbai held that a UAE-based domain registrar's income from domain registration services, web hosting services, and sponsorship income was not taxable in India. The tribunal ruled that domain registration income does not constitute royalty under India-UAE DTAA as the assessee had no rights in domain names, merely facilitating registration. Web hosting income was also not royalty since customers lacked independent control over server space. Regarding sponsorship income from a two-day conference, the tribunal found no permanent establishment existed as the event was not core business activity and was merely preparatory/auxiliary in nature. All additions were directed to be deleted, allowing the assessee's appeal entirely.

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The core legal questions considered in the appeals relate to the taxability of certain income streams earned by a UAE-based assessee under the Income Tax Act, 1961 and the India-UAE Double Taxation Avoidance Agreement (DTAA) for the assessment years 2017-18 and 2018-19. The issues are:

1. Whether income from domain name registration services constitutes 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961 and Article 12 of the India-UAE DTAA, thereby taxable in India.

2. Whether income from web hosting services qualifies as 'royalty' under the same provisions and is taxable in India.

3. Whether sponsorship income earned by the assessee from a conference held in India is taxable as business income in India, specifically considering the existence or absence of a permanent establishment (PE) under Article 5 and Article 7 of the India-UAE DTAA.

Issue 1: Taxability of Income from Domain Name Registration Services as Royalty

The legal framework involves Section 9(1)(vi) of the Income Tax Act, 1961, which defines 'royalty' to include payments for the use of, or right to use, trademarks or similar intangible assets. Article 12(3) of the India-UAE DTAA similarly defines 'royalties' as payments received as consideration for the use of or the right to use copyrights, trademarks, patents, designs, or other intellectual property.

The Assessing Officer (AO) held that the income from domain name registration services is taxable as royalty, reasoning that the domain name is an intangible asset akin to a trademark, and that the assessee imparts the right to use the domain name to clients for a fixed period. The AO relied on the Supreme Court decision in Satyam Infoway Ltd. v. Siffynet Solutions (P) Ltd., which recognized that a domain name may have trademark characteristics.

The assessee contested this characterization, asserting that it is a Registrar accredited by ICANN and acts merely as a facilitator in the domain name registration process. It argued that it does not own the domain names nor grants any rights therein; the rights vest solely with the registrant (customer) who registers the domain name. The domain name registration is on a first-come-first-served basis for a limited period, and the Registrar's role is limited to verifying availability and facilitating registration without transferring any intellectual property rights.

The Court examined the domain name registration ecosystem, involving ICANN (regulator), Registry (database maintainer), Registrar (the assessee), and Reseller (third-party intermediaries). It noted that the Registrar does not own or control the domain names and does not have rights akin to trademark ownership. The Court distinguished the Supreme Court decision cited by the AO, emphasizing that the trademark-like protection arises from continuous efforts and goodwill by a particular entity, which does not apply to the Registrar's role.

The Court further considered the definition of 'royalty' under Article 12(3) of the India-UAE DTAA and found that since the assessee does not have any right in the domain names, the payments received do not constitute royalty under the treaty. It also noted that under Section 90(2) of the Act, the provisions more beneficial to the assessee (i.e., the DTAA) prevail.

Consequently, the addition treating domain name registration income as royalty was deleted.

Issue 2: Taxability of Income from Web Hosting Services as Royalty

The AO treated income from web hosting services as royalty, reasoning that the service involves imparting the right to access and use server space, which is valuable and akin to royalty under domestic law and the India-UAE DTAA.

The assessee submitted that the consideration was solely for the use of server space, without granting any independent right, physical access, or license to use the technology platform. The customers do not have control or possession of the servers; the service is a lease of space on servers owned or leased by the assessee.

The Court noted that the India-UAE DTAA's definition of 'royalty' is narrower than the domestic law. It observed that the Finance Act, 2012 amendments expanding the definition of royalty under the Income Tax Act, including Explanation 5 to Section 9(1)(vi), do not apply to the DTAA unless jointly amended by both contracting states. The Court relied on the Delhi High Court decision in DIT v. New Skies Satellite BV, which held that domestic amendments do not affect treaty definitions.

In the absence of any grant of control or independent rights over the equipment to the customers, the Court found no basis to treat web hosting income as royalty under the treaty. It also rejected the AO's linkage of web hosting income to domain registration income, holding that these are independent and mutually exclusive services.

The addition treating web hosting income as royalty was thus deleted.

Issue 3: Taxability of Sponsorship Income as Business Income and Existence of Permanent Establishment

The assessee received sponsorship income from a two-day conference held in India, which it contended was for advertising and educating potential customers, not core business activity or sales generation. The AO added this income as taxable business income, holding that the assessee had a permanent establishment (PE) in India.

The Dispute Resolution Panel (DRP) directed the AO to pass a speaking order on the existence of PE, which the AO did, confirming the PE and taxing the sponsorship income accordingly.

The assessee argued that the conference was a preparatory or auxiliary activity, not constituting a fixed place of business or PE under Article 5 of the India-UAE DTAA. It contended that the sponsorship income, earned from a short-term event, cannot be taxed in India without a PE.

The Court observed that the DRP's direction to the AO to pass a speaking order on PE was beyond its powers under Section 144C(8) of the Act, which allows the DRP only to confirm, reduce, or enhance variations, but not to set aside or remand for further inquiry.

On merits, the Court held that a two-day conference cannot constitute a fixed place of business or PE. Further, organizing such a conference is not the assessee's core business activity but rather a preparatory or auxiliary activity, which Article 5(3) of the DTAA specifically excludes from PE definition.

Therefore, in the absence of a PE in India, the sponsorship income could not be taxed in India as business income, and the addition was deleted.

Significant Holdings and Core Principles Established

On the domain name registration income, the Court held: "Apart from acting as an intermediary in the entire process of domain name registration, the Registrar has no other role to play. Thus, it cannot be held that the assessee functioning as a domain name Registrar had any right in the domain name registered in the name of the customer/registrant, least intellectual property right/intangible asset in the nature of 'trademark'." The Court emphasized that the domain name rights vest solely with the registrant, and the Registrar's role is facilitative, not proprietary.

Regarding web hosting services, the Court clarified: "In absence of a grant of any control over the equipment belonging to the assessee to its customers, the findings of the AO that the amount so received will constitute royalty is not acceptable in view of the provisions of Article 12(3) the India UAE DTAA." It distinguished the broader domestic definition of royalty from the narrower treaty definition and upheld the principle that treaty provisions prevail over domestic law where beneficial.

Concerning sponsorship income and PE, the Court stated: "Mere conducting of a conference only for 2 days in India cannot be said to be a fixed place of business, and ... conducting a conference is not the core business activity of the assessee. Even if, at all, it can only be considered to be in the nature of the preparatory or auxiliary activity, which has been specifically excluded from the definition of permanent establishment under Article 5(3) of the India UAE DTAA." This reaffirmed the principle that short-term or preparatory activities do not create PE and thus do not attract business income tax in India under the treaty.

Finally, the Court applied these principles consistently to both assessment years, allowing the appeals and directing deletion of the impugned additions.

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