TaxTMI 
TaxTMI 
2018 (7) TMI 1809
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....t to the directions of the DRP is erroneous and bad in law as well as in facts. 2. That on the facts and in the circumstances of the case and in law, the AO/DRP has wrongly alleged that receipts from domain name registration amounting to INR 437,761,396 should be charged to tax as royalty as per the provisions of section 9(l)(vi) read with section 115A of the Act. 3. That on the facts and circumstances of the case and in law, the AO/DRP has erred in holding that the web hosting services provided/rendered by the Appellant qualify as fees for included services as per Article 12(4)(a) of the India- USA Tax Treaty as well as under Section 9(l)(vii) of the Act. 4. That on the facts and circumstances of the case and in law, the AO/DRP has erred in not appreciating that the Appellant has characterized income from web hosting services as royalty and already offered the same to tax as per the provisions of section 9(l)(vi) read with section 115A of the Act. 5. That on the facts and circumstances of the case and in law, the A.O/DRP has erred in holding that the appellant has concealed its particulars of income or has not disclosed accurate particulars of income and has separately....
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.... 2. A website is a combination of files, images, text, music etc. As there are more than a billion websites on the internet, it is important for each website to have a unique identity which could be used to connect to that particular website. This identity of a website is its IP address (Internet Protocol address). Any person with internet access can type in the website's IP address that he wishes to browse on his device and he will land on that website. IP address is a series of numbers, which is unique to each website. For instance, the IP address of the website of the Hon'ble Delhi High Court is '164.100.60.183'. 3. Obviously, it is not practical to remember each website's IP address. To solve this problem, Domain Name System was introduced in the early 1980s. Under this system, a website's IP address can be assigned a domain name, a name which can consist of alphabets and numbers. Now, instead of typing the IP address, a user can type the domain name which is assigned to that IP address and reach the website. For instance, the domain name of the website of the Hon'ble Delhi High Court is 'delhihighcourt.nic.in'. Domain name registration ....
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....e use of the trademarks and the income therefrom constitutes 'royalty' within the meaning of clause (vi) read with clause (iii) of constitutes 'royalty' within the meaning of clause (vi) read with clause (iii) of Explanation 2 to section 9(1) of the Act. [Refer Para 12 of the ITAT order at Page 208 of the Paper Book] 10. Hon'ble ITAT while passing order for AY 2013-14 has not appreciated an important fact that the owner of domain name is the ultimate customer and not the Appellant. Consequently, clause (iii) of Explanation 2 to section 9(l)(vi) of the Act will not apply since the Appellant wasn't competent to grant the right to use in the said property which was owned by the ultimate customers. Hence, clause (vi) of Explanation 2 to section 9(l)(vi) of the Act will not apply. 11. The Appellant is in the process of filing an appeal before the Hon'ble Delhi High Court again the said order. Assessing Officer's Contentions for the AY 2014-15 1. The AO passed the assessment order alleging that income from domain name registration amounting to INR 437,761,396 should be charged to tax as royalty as per the provisions of section 9(l)(vi) of the A....
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....while passing its order for AY 2013-14 held that the domain names were similar to trademarks. The services provided by the Appellant were in connection with the use of the trademarks and the income therefrom constitutes 'royalty' within the meaning of clause (vi) read with clause (iii) of Explanation 2 to section 9(1) of the Act. 4. It is relevant to note that the Hon'ble Bench while passing its order for AY 2013-14 considered the order and findings of the AO. However, the Bench has upheld that the income is taxable as royalty by holding that the same is in connection with the use of trademark and not on account of the fact that it is for the granting to the customers, the right to use server (as contented by the AO). Accordingly, the contention of the AO, that income from domain name registration service is for granting a right to use server, no longer holds good. 5. The Appellant in the foregoing paragraphs has mentioned its contentions against the findings and decision of the Hon'ble ITAT for AY 2013-14 since the facts involved in the AY 2014-15 are similar to the facts for AY 2013-14. Contentions with respect to the order passed bv Hon'ble ITAT for ....
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....not already registered) are not owned by anyone for that matter, they simply do not exist. It is the customer who becomes the owner of such domain names upon registration, and can license it to a third party if it so desires. It is perhaps this subsequent licensing by a registered owner of a domain name which could be examined for royalty characterization. 11. The Hon'ble Bench while passing its order relied on the judgment of the Hon'ble Supreme Court in the case of Satyam Infoway Ltd. v. Siffynet Solutions Pvt. Ltd. (2004)(2 SCR 465), Hon'ble Delhi High Court in the case of Tata Sons Ltd. v. Mr. Manu Kishori & Ors. 90(2001) DLT 659 and Hon'ble Mumbai High court in the case of Rediff Communications Ltd. Vs. Cyberbooth (AIR 2000 Bombay 27). The findings in the said decisions are summarized below: * In the decision of Satyam Infoway Ltd. v. Siffynet Solutions Pvt. Ltd. (supra), the Plaintiff, Satyam Infoway Ltd. had registered a domain names with the word 'Sify' with ICANN in the year 1999. Subsequently, in the year 2001, the Respondent, Siffynet Solutions Pvt. Ltd. registered domain names with the word 'Siffy' with ICANN. The Plaintiff alleged ....
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....ights ........... These rules indicate that the disputes may be broadly categorised as : (a) disputes between trademark owners and domain name owners and (b) between domain name owners inter se. What is important for the purposes of the present appeal is the protection given to intellectual property in domain names. A prior registrant can protect its domain name against subsequent registrants. Confusing similarity in domain names may be a ground for complaint and similarity is to be decided on the possibility of deception amongst potential customers. The defences available to a compliant are also substantially similar to those available to an action for passing off under trademark law." 13. Similarly, Bombay High court in the case of Rediff Communications Ltd. (supra) recognized the fact that the registrant is the owner of domain name and domain name registrars merely performs the function of registering a domain name. The domain name registrar does not determine the legality of domain names. Relevant extracts reproduced: "Internet Domain names are similar to telephone number mnemonics, but they are of greater importance, since there is no satisfactory Internet equivalent ....
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.... professionals who help in registering a company's name with the Registrar of Companies (ROC). 17. Simply providing services in connection with a trade mark is not sufficient to invite the application of clause (vi). The said clause shall apply when the services are in connection with "the activities" referred to in that section. It may be noted that the activity referred to in clause (iii) is 'the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;'. Accordingly, an entity which licenses its trade mark and also provides services in connection with the activity of licensing will be covered in clause (iii) for the first set of services and in clause (vi) for the second set of services. 18. If simply providing services in connection with trademark, patent etc. is taken to be covered within the definition of 'royalty' (without there additionally being the grant of a license thereto), the consequences would be absurd. In such a situation, even an advocate drafting an Intellectual Property Right ("IPR") transfer agreement will be receiving 'royalty' for his services as they will be in connection with....
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.... > Amount received for domain name registration (DNR) is not taxable in India becauseo It is not in the nature of FTS as it doesn't involve any human intervention (Ref. submissions before AO, DRP & ITAT in Pages- 62 of Paperbook); o It is not in the nature of Royalty as the appellant does not own copyright in the domain names(Ref. submissions before AO, DRP & ITAT in Pages- 62 of Paper book); o No activity is carried out in India and all the services are rendered outside India. Hence, no part of the payment for such services would be deemed to accrue in India even if the agreement gives rise to a business connection. Claim of Revenue A. Domain Name Registration- > Amount received for DNR is a part of a single and composite process and can't be treated on a separate footing from that of Web Hosting. > The DRA gives rise to a business connection - a fact accepted by the appellant. > Amount received for domain name registration (DNR) is taxable in India as Royalty because-'Domain Name' is an intangible asset in the nature of 'trademark' as held in the following decisions: Satyam Infoway Ltd. Vs. Siffynet Solutions Pvt. Ltd. (SC) 2004 supp (2) SC....
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....l exclusivity is much sought after. The fact that many consumers searching of a particular site are likely, in the first place, to try and guess its domain name has further enhanced this value" The Hon'ble SC, after recapitulating the provisions of the Indian Trade Marks Actl999 (sections 2(l)(m) to 2(zb)), rejected the submissions of the respondents by concluding that a domain name is a sign which can have a distinguishing function indicating the source of a good or of a service and that it thus has the usual features of a trademark. After putting domain names in the same category as trademarks, the Court did not focus on domain names anymore, since there is no use of the phrases domain name' or 'domain names'. It then shifts its focus to passing-off actions in trademark law and held that"... although the operation oh the Trademarks Act. 1999 itself is not extra territorial and may not allow for adequate protection of domain names, this does not mean that domain names are not to be legally protected to the extent possible under the laws relating to passing off." In that case permanent injunction was sought against the defendants from using the trademark/domain name w....
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....ytrip (India) Pvt. Ltd. Vs Dv. CIT (2012)(lTA Nos. 3961/Del/2009 & 4087 /Del/2009) In this case, the issue in question was whether website development cost should be treated as "software" or as "intangible asset" for the purpose of capitalization and allowance of depreciation. The Hon'ble ITAT, Delhi, dismissed the appeal affirming the decision of CIT(A) that it is in the nature of an "intangible asset." > That in lieu of receipt of Domain Registration charges, the Registrar appellant has permitted the Registrantto use all or some rights in the said asset; > The claim of the appellant that it is only a channel between the Registrant and the Registree can't be accepted on account of the following - a. That the appelant has been accredated by ICAAN to register domain names and as per the Accredition Agreement between the appellant and ICAAN, the rights to register, assign and transfer and managespecific domain names lies exclussively with the appellant. b. The Appellant enjoys absolute and exclussive rights to assign domain names under specific domain extensions. Neither ICAAN nor Registry Operator can allocate, assign, insert, transfer, deactivate the domain names....
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.... of such assigned rights to the Registrant to enable it to use such rights in respect of such property i.e. domain names. > Domain Registration charges were made to the Appellant inside India: > Accordingly, and in view of the above, the amount received by the appelant towards Domain Registration chrges are in the nature of 'Royalty" within the meaning of section 9(l)(vi) and should be taxed accordingly. > Provisions of DTAA not aplicable as the appellant has requested not to be considered under the provisions of India-USA DTAA. > Since the nature of payment is in the nature of "Royalty" which was paid/received in India and there is business connection, the enire amount received towards Domain Registration Chrges should be treated as accrued or arises or as deemed to accrue or arise in India. > Even otherwise, the appellant does not challenge the fact that income has already been 'received' within the meaning of section 5(2)(a) of the Act. > Moreover, the claim of the appellant that there is no human intervention involved is also not acceptable because of the following - a. In case of manual renewal, registrant may renew the domain by calling the cu....
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....son who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government : [Provided further that not....
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....f royalty as provided in Section 9(1)(vi) of the Income-tax Act. We find that Hon'ble Apex Court has considered the similar aspect in the case of Satyam Infoway Ltd. (supra). The question before Hon'ble Apex Court was whether internet domain names are subject to the legal norms applicable to other intellectual properties such as trademarks. Hon'ble Apex Court decided the issue in favour of the assessee. The relevant observation of their Lordships reads as under :- "The use of the same or similar domain name may lead to a diversion of users which could result from such users, mistakenly accessing one domain name instead of another. This may occur in e-commerce with its rapid progress and instant (and theoretically limitless) accessibility to users and potential customers and particularly so in areas of specific overlap. Ordinary consumers/users seeking to locate the functions available under one domain name may be confused if they accidentally arrived at a different but similar web site which offers no such services. Such users could well conclude that the first domain name owner had misrepresented its goods or services through its promotional activities and the first domain owne....
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....e Court held that in the case of a registration of domain names of third party trademarks of well-known names, there was jurisdiction to grant injunctive relief when the defendant was equipped with or was intending to equip another with an instrument of fraud. It was also held that a name which would by reason of similarly to the name of another, inherently lead to passing off, was such an instrument. It was held that in case it would not inherently lead to passing off but the Court concluded on the facts without regard to the defendant's intention that the name was produced to enable passing off, was adapted to be used for passing off and, if used, was likely to be used fraudulently, an injunction would be appropriate. 8. In Rediff Communications Ltd. Vs. Cyberbooth AIR 2000 Bombay 27 the user of the Website "www.radiff.com" was injuncted as it was held deceptively similar to the plaintiff's website "www.rediff.com". In the above decision, the Court held that the Internet domain names are of importance and can be a valuable corporate asset and such domain name is more than an Internet address and is entitled to protection equal to a trade mark. It was held that with the advance....
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....ssessee's case are clearly different. In the case under appeal before us, the issue is whether the fees received by the assessee for rendering services for domain registration can be said to be royalty. Therefore, in our opinion, the above decision of Hon'ble Delhi High Court relied upon by the learned counsel for the assessee would have no application. The learned counsel has also relied upon the decision of Authority for Advance Rulings in the case of Dell International Services (India) Private Limited (supra). In that case also, the issue before the Authority for Advance Rulings was whether the payment for providing communication through telecom bandwidth can be termed as royalty within the meaning of Section 9(1)(vi) of the Income-tax Act. Thus, the facts in the above case were also different than the facts under appeal before us. On the other hand, the issue before Hon'ble Apex Court in the case of Satyam Infoway Ltd. (supra), Hon'ble Jurisdictional High Court in the case of Tata Sons Limited (supra) and Hon'ble Bombay High Court in the case of Rediff Communications Ltd. - AIR 2000 Bombay 27 was whether the domain names can be considered as intellectual properties such....