Domain Name Registration Service is
‘Royalty’ – A far fetched proposition
The recent decision of the Delhi bench of Income Tax Appellate Tribunal [2018] 92 Taxmann.com 241 (Delhi-Trib) on
domain name registration service, makes interesting reading. Go Daddy, a Non-Resident
Entity with accreditation to the Internet Corporation for Assigned Names and
Numbers (ICANN) is in the business of granting registration of domain names to
Indian entities against payment of certain fee.
Along with this service, the Appellant also provides services of web
hosting. Go Daddy paid tax on Web
Hosting Services treating it as Royalty Income, while it took a stand that
domain registration fee is not taxable in India as it was neither in the
nature of Royalty nor in the nature of Business Profits owing to absence of any
business connection. The department’s stand
before the DRP and ITAT was that domain registration service was
- a. an essential requirement to access Go Daddy’s servers;
- b. essential, and inextricably linked/connected to webhosting;
- c. a highly technical process;
- d. subject to the exclusive right of Go Daddy which could own, allocate, register, transfer, cancel/deactivate, renew, suspend, auction and exploit domain names; and finally
- e. paid for in India.
and for these reasons, claimed that the service was in the nature of
Royalty. The argument succeeded with the Dispute Resolution Panel ( not
surprising at all! ) before the matter was taken on appeal to the ITAT by Go
Daddy.
The ITAT went at length to show that Domain Name
was in the nature of ‘Trade Mark’, a valuable Intellectual Property Right, and fortified
this by referring to the proliferation of trade mark disputes in the country. The
ITAT used this as a basis to hold that domain registration services amounts to rendering of services in connection with
the activity of use of a trademark and hence qualifies as ‘Royalty’ within
the meaning of clause (vi) read with clause (iii) to Explanation 2 to Sec
9(1)(vi). Importantly, none of the
reasoning of the department was discussed and hence the conclusion of the
Tribunal cannot be considered as arising from such reasoning.
Comments and
Analysis:
While there is no gainsaying that domain names are ‘trade marks’, the
conclusion that by virtue of allotting the domain name, Go Daddy ended up
rendering a service amounting to Royalty, does not appear convincing.
It may be appreciated that it was never the contention of the Tribunal
that the consideration was for ‘use of
Trademark’ as otherwise, the decision could have been arrived at, with reference
only to clause (iii). The
conclusion in fact was that services had been rendered ‘in connection with the use of trademark’. This leads us to the question - when the activities
of Go Daddy did not address the description of ‘use of trademark’, how could
services in connection with the impugned activity, give rise to Royalty? The
understanding of this writer is that royalty cannot be determined with
reference to clause (vi) alone – the
activities of the non-resident should answer the description of royalty, alternatively or cumulatively, in
terms of (i) to (v) before checking applicability of (vi). Let us await the High Court verdict on the
issue.
An interesting feature of this case is that the Appellant did not claim
‘Tax residency’ status in United States of America in which it was
located. Thus, the conclusion was
reached de hors the Indo-US
treaty. Given that the Treaty definition
does not include the ‘ services in
connection with’ condition, the decision may have gone in the Appellant
favour had the Treaty been applied.
Very interesting and informative
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