The income Tax Appellate Tribunal (ITAT) of Mumbai directed the Assessing Officer (AO) to delete the addition made on Domain Sale Income, recognised it as Trademark, and charged Royalty.
The applicant contended that the 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).
Further, AO based on his conclusion contended that the Appellant is the 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 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’, incorporated in the United Arab Emirates (‘UAE‟) and a tax resident of UAE.
The assessee filed its return of income declaring a total income of Rs. 8,10,94,810 and was selected for scrutiny and statutory notices under the Act were issued.
Porus Kaka and Divesh Chawla, counsels appearing for the assessee, submitted that the assessee is a Registrar, who is authorised by ICANN and acts as an intermediary in the entire process of domain name registration.
Further contended that the domain name is not an intellectual property right of the assessee and the right, of any sort, is only with the customer/registrant.
Additionally, the role of the assessee is merely to check the domain name sought to be registered by the customer in the database maintained by the Registry.
The tribunal observed that in the entire process, the only person who can claim the right over the domain name can only be the customer.
In addition, it was stated that the Registrar’s activity does not lead to the transfer of any rights in the domain name because it is only permitted to facilitate registration of the domain name after confirming its availability in the registry’s database, which is governed by the Internet Corporation for Assigned Names and Numbers (ICANN).
The bench noted the case of DIT v. New Skies Satellite BV, [2016] 382 ITR 114, in which the Delhi High Court held that the Finance Act, 2012, which added Explanations 4, 5, and 6 to section 9(1)(vi), by itself would not affect the meaning of the term “royalty” as mentioned in the DTAA, unless the DTAA is amended jointly by both parties.
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. Furthermore, the bench found no justification for tying together the AO’s income from domain registration services and its taxability because they are independent of one another and mutually exclusive. The AO is therefore instructed to remove the addition made on the basis of revenue from web hosting services.
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