2025 (5) TMI 213 - AT - Income Tax

Accrual of income in India - Eligibility of the assessee benefit of DTAA and taxability of income from non-domain services such as web hosting web designing services etc. - assessee has submitted that Appellant had claimed that the income earned by it from provision of non- domain services was not chargeable to tax in India in accordance with the provisions of the Act read with India- USA DTAA - AO had held that the income earned by the appellant was taxable in India as FTS /FIS as per section 9(1)(vii) of the Act as well as 12(4) (a) of India -USA DTAA - HELD THAT - The co-ordinate bench in the assessee s own case in 2025 (1) TMI 449 - ITAT DELHI wherein the tribunal made a distinction between liability to taxation and actual payment tax. The Tribunal has clarified that liability to taxation refers to the fundamental power to tax an income through the incidence of taxation which may differ from the actual payment to tax We hold that the assessee should be qualify as a resident under article 4 of the India-USA DTAA and entitled to avail the benefits under the India-USAA DTAA. Ground raised by assessee is decided in favour of the assessee. Income earned by the Appellant from domain name registration services - chargeable to tax in India as royalty under the provision of section 9(1) (vi) of the act as well as Article 12(3) of India- USA DTAA - HELD THAT - We find that this view has been affirmed in Go Daddy. Com LLC 2025 (1) TMI 449 - ITAT DELHI as held that the income earned by the Appellant from providing domain name registration services to Indian customers is not taxable in India under either section 9(1) (vi) of the Act or Article 12(3) of the India-USADTAA. Income earned income from providing services (such as web hosting web designing SSL certification services and sale of on-demand products) to Indian customers - The co-ordinate bench in the assessee s own case in 2025 (1) TMI 449 - ITAT DELHI income from provision of non-domain services (such as web hosting web designing services etc.) do not make available any technical knowledge experience skill know-how or processes or result in transfer of any technical plan or technical design to the users. Accordingly the consideration received by the Appellant for rendering such services should fall outside the ambit as FIS as per Article 12(4)(b) of the India-USA DTAA.

Summary

The core legal questions considered by the Tribunal in this appeal include:

1. Whether the final assessment order making a substantial addition to the returned income is valid under the provisions of the Income Tax Act, 1961, particularly in light of statutory timelines under section 153.

2. Whether the appellant qualifies as a resident under Article 4 of the India-USA Double Taxation Avoidance Agreement (DTAA) and is therefore entitled to treaty benefits.

3. Whether the income earned from domain name registration services is taxable in India as 'royalty' under section 9(1)(vi) of the Act and Article 12(3) of the India-USA DTAA.

4. Whether the income from non-domain services such as web hosting, web designing, SSL certification services, and sale of on-demand products is taxable in India as fees for technical services (FTS) under section 9(1)(vii) of the Act and Article 12(4) of the India-USA DTAA.

5. Whether interest under sections 234B and 234C and penalty proceedings under sections 274 read with 270A of the Act were rightly initiated.

Issue-wise Detailed Analysis

1. Validity of Final Assessment Order and Statutory Timelines

Although grounds relating to the validity of the final assessment order and statutory timelines under section 153 of the Act were raised, the appellant's counsel did not press these grounds during the hearing. Consequently, these issues were decided against the appellant as not pressed, and no further analysis was undertaken by the Tribunal.

2. Eligibility for DTAA Benefits and Tax Residency under Article 4

The Assessing Officer (AO) denied DTAA benefits on the ground that the appellant, being a Limited Liability Company (LLC) under US tax laws, is a fiscally transparent entity and thus not liable to tax in the USA in its own hands. Consequently, the AO held that the appellant did not qualify as a resident under Article 4(1)(a) or (b) of the India-USA DTAA.

The appellant contended that the issue is settled in its favor by coordinate bench decisions, including the case of its sister concern, which held that fiscally transparent entities are entitled to DTAA benefits where a valid Tax Residency Certificate (TRC) is issued by the relevant tax authorities. These decisions distinguished between "liability to taxation" and actual payment of tax, clarifying that liability refers to the fundamental power to tax income, regardless of whether tax is actually paid.

The Tribunal relied on these coordinate bench decisions and authoritative precedents such as Linklaters LLP vs. ITO and Herbert Smith Freebills LLP vs. ACIT, which granted treaty benefits to fiscally transparent entities. The Tribunal emphasized that the appellant qualifies as a resident under Article 4 of the India-USA DTAA and is entitled to treaty benefits. This conclusion was reached after careful consideration of the legal framework distinguishing liability to tax from actual tax payment, and the factual matrix establishing the appellant's status as a US resident for treaty purposes.

3. Taxability of Income from Domain Name Registration Services as Royalty

The AO held that income from domain name registration services amounted to 'royalty' under section 9(1)(vi) of the Act and Article 12(3)(a) of the India-USA DTAA, reasoning that the receipts were for granting the right to use the appellant's servers, that domain registration is a precondition for web hosting services, and that the process is highly technical.

The appellant disputed this characterization, submitting that it is an ICANN-accredited registrar facilitating domain name registration but does not own the domain names nor confer any proprietary rights in them. The appellant relied on the accreditation agreement with ICANN and agreements with customers to demonstrate lack of ownership or transfer of rights.

The Tribunal referred to binding precedent from the appellant's own case decided by the Delhi High Court for assessment years 2013-14 to 2015-16, which held that domain name registration fees cannot be treated as royalty under section 9(1)(vi) or Article 12(3) of the India-USA DTAA. The Court reasoned that the registrar merely facilitates registration and does not grant or transfer any rights in the domain names. The Supreme Court's decision in Satyam Infoway was also cited to clarify that domain name ownership vests with the registrant, not the registrar.

The Tribunal held that the AO's reasoning lacked appreciation of this legal position and that the income from domain name registration services is not taxable in India as royalty. The Tribunal thus decided this ground in favor of the appellant.

4. Taxability of Income from Non-Domain Services as Fees for Technical Services

The AO treated income from web hosting, web designing, SSL certification, and sale of on-demand products as fees for technical services (FTS) under section 9(1)(vii) of the Act and Article 12(4)(a) of the India-USA DTAA. The AO reasoned that these services were ancillary and subsidiary to domain registration, involved high technicality, and fulfilled the 'make available' condition of the treaty.

The appellant argued that these non-domain services are distinct from domain registration, operate independently, and customers can obtain them from different providers. The appellant contended that these services do not 'make available' any technical knowledge, skill, or processes to the customers, and thus do not qualify as FTS under the Act or DTAA.

The Tribunal analyzed the nature of domain registration and web hosting services in detail, explaining that domain names serve as addresses on the Internet, while web hosting provides the storage and infrastructure for websites. The Tribunal noted that the AO erred in conflating these distinct services and in treating web hosting and related services as ancillary to domain registration.

The Tribunal also examined the 'make available' clause, emphasizing that it requires the transfer of technical knowledge or skills that enable the recipient to use such knowledge independently. The Tribunal found that the appellant's services do not transmit any enduring technical knowledge or know-how to customers, who merely pay for customized services without acquiring any transferable technical expertise.

The Tribunal relied on several coordinate bench decisions supporting this view, including Millennium Infocom Technologies Ltd., Campus EAI India Pvt. Ltd., Amazon Web Services, Inc., Sunguard Availability Services LLP, and Esm Sys Pvt. Ltd., which held that web hosting and cloud services do not constitute FTS or royalty as per the Act and relevant DTAAs.

Accordingly, the Tribunal held that income from non-domain services is not taxable in India as FTS and allowed this ground in favor of the appellant.

5. Levy of Interest and Penalty Proceedings

The issues relating to levy of interest under sections 234B and 234C and penalty proceedings under sections 274 read with 270A were raised but not pressed by the appellant's counsel. These grounds were therefore decided against the appellant as not pressed, and no substantive analysis was undertaken.

Significant Holdings

"The law in this regard is quite settled as it is now settled that the term, 'liability to taxation' has to be distinguished from actual payment of taxation. 'Liability to taxation' indicates the powers of taxing an income through the incidence of taxation and actual payment may be different."

"The income earned by the Appellant from assisting customers in registration of domain names cannot be treated as 'royalty' under the provisions of section 9(1)(vi) of the Act itself."

"The appellant/assessee is only acting as a Registrar and thus offering its services to its customers for having their domain names registered. The fee received by the appellant/assessee for registration of domain names of third parties, i.e., its customers, cannot be treated as royalty."

"The 'make available' clause requires some element of transmitting technical knowledge by which an enduring benefit ensues. The income from provision of non-domain services (such as web hosting, web designing services etc.) do not 'make available' any technical knowledge, experience, skill, know-how, or processes or result in transfer of any technical plan or technical design to the users."

The Tribunal concluded that the appellant qualifies as a resident under Article 4 of the India-USA DTAA and is entitled to treaty benefits. It further held that income from domain name registration services is not taxable as royalty in India, and income from non-domain services is not taxable as fees for technical services. Grounds relating to validity of assessment order, interest, and penalty were not pressed and thus decided against the appellant. The appeal was partly allowed accordingly.