2025 (6) TMI 1136 - AT - Income Tax

Domain Name and Web Hosting Services Not Considered Royalty Under India-UAE Tax Treaty Provisions

PDR Solutions FZC Versus ACIT, Circle, International Taxation 2 (2) (2), New Delhi.

The Mumbai Tribunal addressed two key tax issues involving domain name registration and web hosting services under the India-UAE DTAA. The SC ruled that ... Income deemed to accrue or arise in India - treating the ‘domain name registration services’ receipts as income taxable as royalty u/s 9(1)(vi) of the Act under the Indo-UAE Treaty - AO proposing to tax the income from web hosting services also as royalty u/s 9(1)(vi) of the Act as per the said tax treaty. HELD THAT:- Hon’ble Delhi High Court in the case of Godaddy.Com LLC [2023 (12) TMI 718 - DELHI HIGH COURT] has settled the issue of treating fee received by the assessee on account of domain registration services as not giving rise to royalty income and in assessee’s own case for AY 2017-18 and 2018-19 reported in [2023 (1) TMI 365 - ITAT MUMBAI], the coordinate Bench of the Mumbai Tribunal has held that income received by the assessee towards domain registration services as per Article 12 of relevant DTAA would not be taxable in India. Web hosting services provided to the customers has also been considered by the coordinate bench in the case of the assessee held 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. Further, we find no basis in linking the taxability of income from web hosting services with income from domain registration services by the AO, as both are independent and mutually exclusive. Hence, the AO is directed to delete the addition on account of income from web hosting services. Accordingly, ground No. II raised in assessee's appeal is allowed. Coordinate Bench at Delhi in the case of GoDaddy.com LLC [2023 (12) TMI 718 - DELHI HIGH COURT] has held that such incomes are even falling beyond the scope of ‘fee for technical services’ or ‘fee for included services.’ Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether receipts for domain name registration services constitute 'royalty' under section 9(1)(vi) of the Income Tax Act read with the India-UAE Double Taxation Avoidance Agreement (DTAA). 2. Whether receipts from web hosting services constitute 'royalty' under section 9(1)(vi) of the Income Tax Act read with the India-UAE DTAA. 3. Whether income from domain registration and web hosting services fall within the scope of 'fees for technical services' or 'fees for included services' under the India-UAE DTAA. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of domain name registration receipts as 'royalty' Legal framework: The question is governed by the domestic definition of 'royalty' under section 9(1)(vi) of the Income Tax Act and by the corresponding definition in Article 12 (or equivalent) of the India-UAE DTAA. Post-2012 domestic amendments (Explanation 5 to section 9(1)(vi) and related explanations) broadened domestic scope by removing reliance on possession/control/location of rights, property or information; however, treaty interpretation is guided by the treaty text agreed by Contracting States. Precedent treatment: Coordinate decisions of tribunals and a High Court have considered identical issues and have held that fees for domain registration do not amount to 'royalty' under the India-UAE DTAA; those decisions were followed in the present decision. Interpretation and reasoning: The Court observed that the domain registration activity does not confer proprietary rights, control, or a transferable right in an intellectual property to the registrant in a manner contemplated by the DTAA's definition of 'royalty.' The court emphasized that the domestic widening of the concept (via Explanation 5) is not automatically applicable to the treaty definition unless the treaty itself is amended jointly by the Contracting States. Consequently, the narrower treaty definition governs taxability under the DTAA. Ratio vs. Obiter: Ratio - where service consideration does not confer the rights/control contemplated by the DTAA's 'royalty' definition (as opposed to the wider domestic definition), such receipts are not taxable as royalty under the India-UAE DTAA. Obiter - reflections on the broader policy behind domestic amendments and their inapplicability to treaties absent joint amendment. Conclusion: Receipts for domain name registration services do not give rise to taxable 'royalty' under section 9(1)(vi) read with the India-UAE DTAA; therefore additions on this ground must be deleted. Issue 2 - Taxability of web hosting receipts as 'royalty' Legal framework: As with domain registration, assessment of web hosting receipts requires comparison of the service/content of the arrangement with the treaty definition of 'royalty' (Article 12 or equivalent) and the domestic provision section 9(1)(vi). The 2012 explanatory amendments to the domestic law are relevant domestically but do not change treaty language. Precedent treatment: Coordinate tribunal decisions considering similar web hosting facts have found that web hosting charges do not constitute 'royalty' under the India-UAE DTAA. A High Court decision has been referenced for the proposition that domestic explanatory amendments do not alter treaty terms without mutual amendment. Interpretation and reasoning: The Court analyzed the nature of web hosting - provision of server space, storage, connectivity, and data-centre services where customers do not obtain independent or exclusive rights or physical control over the hosting equipment, nor any licensed technology platform. Because the DTAA does not incorporate the broader domestic definition, the absence of a grant of control, proprietary right, or license means the receipts do not fall within the treaty's notion of 'royalty.' The Court rejected the AO's linkage between domain registration and web hosting taxability, treating both as factually and legally independent activities; therefore the taxability of one cannot be inferred from the other. Ratio vs. Obiter: Ratio - where hosting services amount to provision of server space/connectivity without grant of rights or control over equipment or technology, such receipts are not 'royalty' under the India-UAE DTAA. Obiter - discussion of technological characterizations of hosting and distinctions from licensed IP transfers. Conclusion: Income from web hosting services is not taxable as 'royalty' under section 9(1)(vi) read with the India-UAE DTAA; the addition on account of web hosting is to be deleted. Issue 3 - Whether domain registration and web hosting incomes are 'fees for technical services' or 'fees for included services' Legal framework: Article(s) of the India-UAE DTAA governing technical/other service fees (e.g., 'fees for technical services' or similar phrases) must be interpreted with reference to the treaty text and the factual nature of services rendered. Domestic classifications alone cannot override treaty definitions. Precedent treatment: Prior tribunal decisions (including coordinate benches) have examined whether such incomes fall within the definition of technical or included services and have concluded negatively in contexts with analogous facts. Interpretation and reasoning: The Court noted that the nature of domain registration and typical web hosting (provision of infrastructure, space, connectivity) do not amount to rendering technical services that transfer specialized technical knowledge, managerial services, or technical expertise as envisaged by the DTAA's provisions on technical/service fees. The Tribunal further relied on previous findings that such incomes fall beyond the scope of 'fee for technical services' or 'fee for included services' under the relevant Article(s) of the treaty. Ratio vs. Obiter: Ratio - where services are limited to provision of server space/connectivity and domain registration facilitation without transfer/licensing of technical know-how, they do not constitute 'fees for technical services' or similar treaty-covered service fees. Obiter - ancillary observations about modern digital service characterizations and distinctions between infrastructure provisioning and technical service delivery. Conclusion: Receipts from domain registration and web hosting do not fall within the DTAA categories of 'fees for technical services' or 'fees for included services'; therefore they are not taxable under those treaty heads. Cross-references and final operative conclusion The Court followed coordinate tribunal decisions and relevant High Court authority holding that domestic amendments broadening 'royalty' cannot be unilaterally applied to the DTAA. Applying the treaty text to the factual matrix (no grant of rights, control, license, or technical transfer), the Court concluded that neither domain registration nor web hosting receipts are taxable as 'royalty' or as fees for technical/included services under the India-UAE DTAA, and accordingly sustained deletion of the impugned additions.