TaxTMI 
TaxTMI 
2023 (1) TMI 365
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....the consent of the parties, the assessee's appeal for the assessment year 2017-18 is taken up as a lead case. ITA no.1855/Mum./2022 Assessee's Appeal - A.Y. 2017-18 3. In its appeal, the assessee has raised following grounds:- "On the facts, and in the circumstances of the case, and in law, the Appellant craves to prefer an appeal against the order dated 31 May 2022 passed by the Deputy Commissioner of Income- tax (Int. Tax)-3(3)(2) (hereinafter referred to as the 'learned AO) under Section 143(3) read with Section 144C(13) of the Income-tax Act, 1961 on the grounds as set out herein: The following grounds are independent of, and without prejudice to, one another: GROUND 1: OBJECTION AGAINST ADDITION ON ACCOUNT OF INCOME FROM DOMAIN REGISTRATION SERVICES On the facts and circumstances of the case and in law, the Assessing Officer (AO) erred in alleging that income from Domain Name Registration services is taxable as 'Royalty' under Section 9(1)(vi) of the Income Tax Act, 1961 (Act') and under the India- UAE treaty (tax treaty"). ). The AO based on his conclusion contended that the Appellant is the owner of the domain name....
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....or otherwise, the above grounds of appeal, either before or during the hearing of the appeal." 4. The brief facts of the case are: The assessee is incorporated in United Arab Emirates ('UAE') and is a tax resident of UAE. The assessee is engaged in the business of web presence, and sale of domain names to global customers through its B2B brands 'Logic Boxes', 'Reseller Club', and B2C brand 'Big Rock'. The B2B business represents the sale of domain names to domain name resellers, whereas B2C represents the sale of domains to third-party ultimate customers. The business of the assessee also comprises of providing web hosting services whereby server spaces are given on lease/hire to clients. For the year under consideration, the assessee e-filed its return of income on 30/11/2017 declaring a total income of Rs. 8,10,94,810. The return of income filed by the assessee was selected for scrutiny and statutory notices under the Act were issued. In view of the international transactions entered into by the assessee with its associated enterprises, reference was made to the Transfer Pricing Officer for the determination of arm's length price in respect of the said international transactio....
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....ices are akin to the provision of registration services for registering the name of a Company with the Registrar of Companies, or more commonly, registering a motor vehicle with the Regional Transport Authority. It was further submitted that in the event of trademark infringement suits filed by parties with regard to the use of domain names with mala fide intention, the Registrars/Reseller cannot be sued since they did not have any right in the domain name which was registered by them as a mere facilitator. 7. The AO vide draft assessment order dated 26/09/2021 passed under section 143(3) of the Act did not agree with the submissions of the assessee and held that domain name registration is taxable in India as royalty because domain name is an 'intangible asset' in the nature of 'trademark'. The AO further held that the assessee is giving the client right to use its domain name for a fixed period and for a fixed amount of time. Further, the assessee is not selling the domain name but registering or renewing it, which clearly indicates that the assessee as a domain name services provider is the owner of the domain name and it is only providing the right to use the domain name to ....
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....source. Computers or any other internet resources communicate by using numbers, called IP addresses, to contact each other. Domain names serve to identify such internet resources with a text base label that is easier to memorise than the numerical addresses used in the Internet Protocols. Domain names are also used as simple identification labels to indicate ownership or control of a resource. Organisations can choose a domain name that corresponds to their name, helping internet users to reach them easily. Thus, with the domain name, an organisation named ABC can state its website as 'abc.com' instead of 123.876.321/abc/. 12. The domain name registration process involves ICANN, Registry, Registrar, and Reseller. The role of each party in this process is as under: (a) ICANN is an organisation charged with overseeing the name and number systems of the Internet. In addition to ICANN, each Top-Level Domain ('TLD') is maintained and serviced technically by an administrative organisation operating a registry. (b) The Registry is responsible for maintaining the database of names registered with the TLD it administers. ICANN manages the TLD with the help of hundreds o....
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....name came into existence in favour of the customer only upon registration and the same belongs to the customer only during the period of registration, which is generally for one year. If after the expiry of the period of registration, the customer does not renew the registration then the same domain name would be available to another customer to be registered in its name. Such registration can also be done through a different Registrar for the same domain name. The purpose of registration of a domain name is primarily to have exclusivity of domain name vis-à-vis the customer during the period of registration since the internet allows for access to the domain name without any geography limitation. Thus, the domain name is registered on a first-come-first-serve basis. However, in this entire process, the only person who can claim the right over the domain name can only be the customer. As the activity of the Registrar does not result in transferring of any right in the domain name since its scope of activities is restricted only to facilitate the registration of the domain name after checking its availability in the database maintained by the Registry, under the supervision of....
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.... Registrar can only be asked to suspend registration. The Hon'ble High Court further held that the entire process of registration itself is entirely automated/machine driven and therefore the notion that the domain name Registrar has a person or a team of person scanning and checking every domain name application betrays a wholesale lack of understanding of how domain name registration actually works. Thus, the registration will continue until suspension or expiry. 16. Therefore, from the above, it is evident that 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'. In the present case, there is no dispute regarding the fact that the assessee is a resident of UAE and therefore the assessee is entitled to the provisions of the India UAE DTAA. The Tax Residency Certificate ('TRC') for the year under consideration also forms part of the paper book filed by the asses....
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....s. It was further submitted that the assessee also manages to procure servers on lease in respect of providing web hosting services to the end customers. Therefore, the assessee provides web space to various customers to host their websites on its third-party servers either owned or leased. The assessee further submitted that the consideration paid is for the use of the server space, and the customers neither have an independent right to use the server space nor have any physical access to it. Further, there is no right to use the technology platform nor there is any grant of license to use the platform. The AO vide draft assessment order did not agree with the submissions of the assessee and held that customers of the assessee are using the server of the assessee and paying the fees for the same. The AO further held that web hosting is interlinked with the domain name and therefore the amount received by the assessee in respect of web hosting/data centre services is in nature of royalty under the Act as well as under the provisions of the India UAE DTAA. Accordingly, the AO made an addition of Rs. 3,05,20,419 to the total income of the assessee. 20. The assessee filed detailed ....
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....der the provisions of the Act. However, we find that similar amendment has not been carried out in the provisions of India UAE DTAA. In DIT vs New Skies Satellite BV, [2016] 382 ITR 114 (Delhi), the Hon'ble Delhi High Court held that unless the DTAA is amended jointly by both parties, Finance Act, 2012 which inserted Explanations 4, 5 and 6 to section 9(1)(vi) by itself would not affect the meaning of term 'royalty' as mentioned in the DTAA. Therefore, 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. 24. The issue arising in ground No. III, raised in assessee's appeal, is pertaining to the addition on account of sponsorship i....
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....lls/booths to various third parties to market their brands and products through which it earns income. During the year, the assessee conducted a conference in India only for 2 days and from which it earned sponsorship income, which has been held to be taxable as business income by the Revenue. We find that vide its submission dated 09/03/2021, the assessee provided the details of sponsorship to the AO, which forms part of the paper book on page 69. However, without commenting on the same, the AO made the impugned addition. In further proceedings, the learned DRP directed the AO to pass a speaking order with regard to the existence of assessee's permanent establishment in India. At the outset, it is pertinent to note that under section 144C(8) of the Act the DRP may confirm, reduce or enhance the variation proposed in the draft assessment order, however, it cannot set aside any proposed variation or issue any direction for further enquiry and passing of the assessment order. Thus, we find that the directions issued by the DRP to the AO to pass a speaking order in respect of the existence of permanent establishment is completely contrary to the provisions of section 144C(8) of the Ac....
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....e owner of the domain name and is imparting the right to use in respect of a domain name thus erroneously considering it as a 'Trademark'. The Assessing Officer (AO') erred in understanding the fact that the domain name does not lie with the appellant, and accordingly, there is no question of imparting rights for further consideration, thus it cannot be classified as the trademark and cannot be termed as "Royalty" GROUND II: OBJECTION AGAINST ADDITION ON ACCOUNT OF INCOME FROM WEB HOSTING SERVICES On the facts and circumstances of the case and in law, the Assessing Officer ('AO') erred in proposing that income from web hosting services is taxable as 'Royalty' under Section 9(1)(vi) of the Income Tax Act, 1961 (Act') and under the India- UAE treaty (tax treaty') in the absence of any physical access or control or possession or independent right being granted by the appellant to the payer. The Assessing Officer ('AO') erred in concluding that the income from web hosting is interlinked to income from domain registration services and considered as royalty despite the fact that the said services are mutually exclusi....