TaxTMI 
TaxTMI 
2018 (7) TMI 1809
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....w, the impugned order of assessment framed by the AO pursuant 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 particul....
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..../SSL Certification Services 437,761,396/- Domain registration Meaning of domain name 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. ....
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....per Book] 9. Hon'ble Bench vide order dated April 13, 2018 held that the domain names were similar to trademarks and 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 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 20....
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....y' under section 9(l)(vi) of the Act by holding that the income was received by the Appellant on account of granting to the customers, the right to use its server and thus is in the nature of right to use industrial, commercial or scientific equipment. 3. The Hon'ble Bench 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....
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....ion 9(l)(vi) of the Act, it emerges that the recipient of the consideration, should be either the owner of the 'trademark' or registered holder of the 'trademark'. There should also exist a connection in course of trade between the payer and the recipient.' 10. The domain names requested by the customers (if 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 o....
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....ser of a mark. Besides the UDNDR Policy is instructive as to the kind of rights which a domain name owner may have upon registration with ICANN accredited Registrars. In Rule 2 of the Policy, prior to application for registration of a domain name, the applicant is required to determine whether the domain name for which registration is sought "infringes or violates someone else's rights ........... 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 f....
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....ht in the domain names "Rights in Data. Registrar disclaims all rights to exclusive ownership or use of the data elements listed in Subsections 3.2.1.1 through 3.2.1.3 for all Registered Names submitted by Registrar to the Registry Database for, or sponsored by Registrar in, each gTLD for which it is Accredited." 16. It is submitted that the services provided by the Appellant are similar to services provided by 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. ....
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....e completed and Registered Domain names can't be customised and used for the benefit of the client without entering WHA (irrespective of whether with the appellant or any other agency) and specifying the details of domain name settings and name servers. (Ref. Cl. 10 of DRA, p.43-44 of PB as discussed above) Ouestion-2 Taxability of the receipts in lieu of DNR and WHA: Claim of the Appellant > Amount received for web-hosting (WHA) is taxable in India and offered to tax as Royalty; > 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 Re....
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.... must, of necessary, be peculiar and unique and where a domain name is used in connection with a business, the value of maintaining an exclusive identity becomes critical. "As more and more commercial enterprises trade or advertise their presence on the web, domain names have become more and more valuable and the potential for dispute is high. Whereas large number of trademarks containing the same name can comfortably co-exist because they are associated with different products, belong to business in different jurisdictions etc.. the distinctive nature of the domain name providing global 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 tradem....
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....ers a domain name decides where on the internet those who invoke that particular name- whether bv typing it into their web browsers, by following a hyperlink, or by other means - are sent. Ownership is exclusive in that the registrant alone makes that decision. Moreover, like other forms of property, domain names are valued, bought and sold, often for millions of dollars....Finally, registrants have a legitimate claim to exclusivity. Registering a domain name is like staking a claim to a plot of land at the title office. It informs others that the domain name is the registrant's and no one elses's." Makemytrip (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 th....
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....use it to earn income.(Cl. 10 of Domain Registration Agreement, P. 44 of PB) viii. Right of refusal/exclusion of registrant from accessing the registered domain and customising it or advertising there in in case the domain has been parked. (Cl. 10 of Domain Registration Agreement, P. 44 of PB) ix. Right to issue Certified Domain seal which is a trademark and is protected by copyright, trademark and other intellectual property laws. > The appellant Registrar thus, has right to own, assign, allocate, transfer, cancel, deactivate, suspend, auction, renew and exploit domain names under accreditation agreement with ICANN. > The appellant Registrar in turn, transfers and allocates all or part 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 aplic....
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....h the sides and perused relevant material placed before us. The limited question before us is whether the domain registration fee received by the assessee can be termed as royalty. At the outset, we clarify that the appellant himself has mentioned that since it is not a tax resident of USA, therefore, it is not claiming any benefit under the provisions of India-US tax treaty. Accordingly, we have to examine within the meaning of Income-tax Act, more particularly, Section 9(1)(vi) to examine whether the receipt by the assessee on account of domain registration fee can be termed as royalty. Section 9(1)(vi) of the Income-tax Act reads as under :- "9. (1) The following incomes shall be deemed to accrue or arise in India :- (vi) income by way of royalty payable by - (a) the Government; or (b) a person 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....
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....dustrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;] (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to [(iv), (iva) and] (v)." 10. The contention of the Revenue is that the domain name is an intangible asset which is similar to trademark. The assessee is rendering services in connection with such domain name registration and therefore, the charges received by the assessee clearly fall within the definition of 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 applicab....
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....s Akash Arora 1999 PTC 201 while granting an injunction restraining the defendants from using Yahoo either as a part of its domain name or as a trademark, learned Single Judge of this Court applied the law relating to trademark to a dispute regarding Internet. It was further held that considering the vast import of Internet and its user, several Internet users are not sophisticated enough to distinguish between the domain names of the parties. It was also held that with the ease of access from all corners of the world, Courts should take a strict view of copying as the potentiality of the harm is far greater because of the easy access and reach by any one from every corner of the globe. The Court also held after analyzing Section 27 and Section 29 of the Trade & Merchandise Marks Act, that passing off action can be maintained in respect of services as well as goods. 7. In British Telecom Plc. Vs. One in a Million 1999 FSR 1 the 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 ....
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.... earth's surface over which a signal is relayed from satellite) of those satellites covered the territory of India. The assessee entered into an agreement with TV channels, communication companies or other companies who desired to utilize the transponder capacity available on its satellite to relay their signals. The customers had their own relaying facilities, which were not situated in India. From those facilities, the signals were beamed into space where they were received by a transponder located in the assessee's satellite. The role of the assessee in this cycle was that of receiving the signals, amplifying them and after changing frequency relaying them over the entire footprint area. For that service, the TV channels made payments to the assessee. The question before the Hon'ble High Court was whether such payments can be said to be royalty chargeable to tax in India. Hon'ble High Court answered the question in the negative. However, the facts in the assessee'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 opinio....
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....ssessee's appeal, which read as under, were not pressed by the assessee at the time of hearing :- "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(1)(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(1)(vi) read with section 115A of the Act." 14. At the time of hearing, the learned counsel stated that the assessee itself has offered the income from web hosting services as royalty. The Assessing Officer has assessed the same as fees for technical services which is upheld by the DRP. He stated that since the rate of tax for royalty as well as for FTS is the same, the assessee would not like to contest ground Nos.3 & 4 because so far actual tax liability is concerned, these grounds are only academic. In view of the....