Domain name registration fees don't qualify as royalty income under tax law, registrar only provides technical services

HC ruled that fees received by US-based domain name registrar for providing registration services to Indian customers do not constitute royalty income under Indian tax law. The court held that the registrar merely facilitates domain name registration without creating or transferring proprietorship rights in domain names. Since the registrar does not own the domain names or grant usage rights, the consideration received cannot be classified as royalty. The court distinguished this case from trademark ownership scenarios, emphasizing that the registrar only provides technical registration services. The decision favored the assessee against revenue authorities.

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Issues Involved:
1. Whether the income received by the appellant for providing domain name registration services amounts to 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961.

Summary:

Issue 1: Whether the income received by the appellant for providing domain name registration services amounts to 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961.

The common question of law framed for consideration was whether the Income Tax Appellate Tribunal (Tribunal) erred in holding that the income received by the appellant for providing domain name registration services amounted to 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961.

The appellant, a US-based company and an ICANN accredited registrar, provides domain name registration, website design, and web hosting services. The appellant charges a fee for facilitating domain name registration, which is shared among the appellant, ICANN, and the registry. The appellant argued that it does not transfer any right to use the domain name to the customer, who is the registrant and owner of the domain name. The Tribunal, however, equated domain names to trademarks and concluded that the consideration received was in the nature of royalty.

The court noted that the appellant does not have a permanent establishment in India and the dispute was confined to the consideration received for domain name registration services. The appellant facilitates the registration and transfer of domain names and does not have ownership rights in the domain names registered. The court emphasized that the appellant, acting as a registrar, does not confer the right to use or transfer the right to use the domain name to another entity.

The court further observed that passing off and injunction actions are entertained where domain name registrations are made in bad faith or to perpetuate fraud. The Supreme Court in Satyam Infoway held that it is the registrant who owns the domain name and can protect its goodwill by initiating passing off actions. The Tribunal's reliance on this judgment was deemed misconceived as the appellant is only a registrar, not the owner of the domain name.

Consequently, the court concluded that the fee received by the appellant for domain name registration services cannot be treated as royalty. The question of law was answered in favor of the appellant, and the appeals were allowed.

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