TMI Blog2018 (7) TMI 1809X X X X Extracts X X X X X X X X Extracts X X X X ..... see’s appeal. - I.T.A .No. 7123/DEL/2017 - - - Dated:- 24-7-2018 - SHRI R. K. PANDA, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER ORDER PER SUCHITRA KAMBLE, JM For The Appellant : Sh. S. P. Singh, AR, Sh. Manoneet Dalal, AR And Smt. Prachi Bhtia, AR For The Respondent : Sh. G. K. Dhall, CIT DR ORDER PER SUCHITRA KAMBLE, JM This appeal is filed by the assessee against the Assessment Order dated 26.10.2017 passed by the DCIT, Circle-(1)(3)(1), New Delhi for Assessment Year 2014-15. 2. The grounds of appeal are as under:- Appeal against the order under section 143(3) read with Section 144C(13) of the Income- tax Act, 1961 ( the Act ) dated 26 October 2017 for the Assessment Year 2014-15 passed by the Deputy Commissioner of Income Tax, Circle 1(3)(1), Intl. Taxation, New Delhi ( AO ) pursuant to the directions of Dispute Resolution Panel-I ( DRP ) 1. That on the facts and in the circumstances of the case and in law, 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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the India-US Tax Treaty. This view was also taken for earlier Assessment Year 2013-14 by the Assessing Officer. Being aggrieved by the same the Assessee filed appeal before us. During the hearing the Ld. DR pointed out that for A.Y. 2013-14, the Tribunal vide order dated 03.04.2018 held this issue against the assessee being ITA No. 1878/Del/2017. 4. The Ld. AR put up his written submission and the same are as under:- Background 1. The Appellant, a Delaware Limited Liability Company, (located in Arizona, USA), is the world's largest ICANN (Internet Corporation for Assigned Names and Numbers) accredited domain name registrar. During the captioned year, the Appellant earned revenues from the following services rendered to Indian customers [Refer Para 3.2 final assessment order at Page 81 of Appeal Set]: Particulars Amount (INR) Offered to tax (INR) Web hosting services/on-demand 411,981,166 411,981,166 Sale Web designing/SSL Certification Services 437 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main name registration process. 7. In a typical domain name registration, a 'Registrant' (i.e. the customer), desirous of registering a domain name, approaches the 'Registrar' (the Appellant). The 'Registrar' then asks the 'Registry' whether the proposed domain name is available. The 'Registry' checks its database and informs the 'Registrar' accordingly. If the domain name is available, i.e., it is not registered in the name of anyone else, the 'Registrant' can pay a fees and get the name registered with the help of the 'Registrar'. In order to keep the domain name, the 'Registrant' has to pay a periodical fee to the 'Registrar' i. e. the fee for domain name registration. Assessment History - AY 2013-14 8. Assessing Officer ( AO ) while passing the assessment order for AY 2013- 14 held that the payment for domain name registration is for use of server of the Appellant and hence amounts to royalty as per section 9(l)(vi) of the Income-tax Act, 1961 ( Act ) as well as Article 12(3)(a) of the India-US tax treaty. [Refer Para 3 of the assessment order at Page 134 of the Paper Book] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the Act and Double Taxation Avoidance Agreement. Unquote 4. The AO also alleged that web hosting services provided/ rendered by the Appellant qualify as fee for technical services ( FTS ) as per Article 12(4)(a) of the India-USA tax treaty as well as under section 9(l)(vii) of the Act. of income as royalty u/s 9(l)(vi) of the Act.[Refer Page 85 of the Appeal Set] 5. The Appellant filed an appeal before Dispute Resolution Panel ( DRP ) which upheld the order of the AO. The AO framed final assessment order dated 26 October, 2017 maintaining the aforesaid position. 6. Being aggrieved by the final assessment order passed by Ld. AO, the Appellant filed an appeal before Hon'ble ITAT. Appellant's contentions with respect to taxability of domain name registration services 1. At the outset the Appellant wishes to submit that facts involved in AY 2013-14 are similar to the AY 2014-15 (i.e. the present AY). 2. The AO while passing orders for both AYs 2013-14 (prior year) and 2014- 15 (year in appeal) has assessed income from domain name registration services as 'royalty' under section 9(l)(vi) of the Act by holding tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Bombay High Court in the case of Rediff Communications (AIR 2000 bnombay 27) (i.e. the decisions relied upon by the Hon'ble Bench). The same have been summarized in paras below. 8. It is submitted that without the ownership of an Intellectual Property right ( IPR) like trademark, there cannot be any licensing and there cannot be any royalty. Para 8.1 of the OECD's commentary on 'Model Tax Convention on Income and on Capital 2014' provides: The definition does not, however, apply to payments that, whilst based on the number of times a right belonging to someone is used, are made to someone else who does not himself own the right or the right to use it. The Hon'ble Calcutta High Court has also given a similar finding in the case of CIT vs. Davy Ashmore India Ltd. (1991)(190 ITR 626). 9. The Hon'ble AAR in the case of Cushman Wakefield (S) Pte. Ltd. (305 ITR 208)(2008)(AAR) held: 'When the above definition of trademark is placed against the definition of royalty arising out of the use of 'trademark', as contained in clauses of Explanation 2 to section 9(l)(vi) of the Act, it emerges that the recipient of the consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Satvam Infowav (supra) has observed that it is the registrant (i.e. customer! which owns the domain name and can protect the same against use by a subsequent registrant. The said decision accordingly is in favour of the Appellant's contention. Relevant extracts mentioned below: Therefore, the domain name not only serves as an address for internet communication but also identifies the specific internet site. In the commercial field, each domain name owner provides information/services which are associated with such domain name The outcome of consultation between ICANN and WIPO has resulted in the setting up not only of a system of registration of domain names with accredited Registrars but also the revolution of the Uniform Domain Name Disputes Resolution Policy (UDNDR Policy) by ICANN on 24th October 1999. As far as registration is concerned, it is provided on a first come first serve basis. While registration with such Registrars may not have the same consequences as registration under the Trademark Act, 1999 nevertheless it at least evidences recognised user of a mark. Besides the UDNDR Policy is instructive as to the kind of rights which a doma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14. It is also submitted that once a customer is registered with a particular Registrar, the customer has the option of switching to any other Registrar for the very same domain name at its will. If the Registrar, in fact, had the right to license and assign a domain name, it would have been at the discretion of the Registrar to transfer the domain name to any customer and not at the discretion of the customer to discontinue the services of the Registrar which had registered its domain name to begin with. Customers are allowed to and as a matter of fact do shift from one Registrar to another. It could not be said that the right to use an IPR is given by one entity in one year and by another entity in another year. Reference may be drawn to Clause 4 of Domain Name Registration Agreement between the Appellant and the customers. (Refer Clause 4 of the Domain Name Registration Agreement at Page 58 of the Paper Book) 15. Appellant wishes to highlight Clause 3.5 of the Registrar Accreditation Agreement between Godaddy and ICANN which indicates that the Appellant does not any right in the domain names Rights in Data. Registrar disclaims all rights to exclusive ownership or use of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant is the Default Web Host (Cl. 10 of DRA, p.44 of PB) 3. In case the details of domain settings of the web host is not given, the domainname is directed to a Parked Page and the client can t customise it as per its needs and can t modify the content displayed in it.(CI.10 of DRA, p.44 of PB) 4. The content, advertisement and revenue from the websites in the parked page are provided by the appellant who uses them to generate revenue. (Cl. 10 of DRA, p.44 of PB) Ouestion-1 Whether DNR and WHA are inter-related or independent processes: Claim of the Appellant That the transactions described in stages 5 8 (i.e. DRA WHA) are processes independent of each other and the taxabilty of the amounts received by it in lieu of these have to examined separately. Claim of Revenue The transactions are NOT processes independent of each other but rather are directly associated or inextricably connected to each other and need to be treated as parts of one single and integrated process. DNR can't be completed and Registered Domain names can't be customised and used for the benefit of the client without entering WHA (irrespecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovide an address for computers on the internet. But the internet has development from a mere means of communication to a mode of carrying on commercial activity. With the increase of commercial activity on the internet, a domain name is also used as business identifier. Therefore, the domain name not only serves as an address for internet communication but also identifies the specific internet site. In the commercial field, each domain name owner provides information/services which are associated with such domain name. Thus domain name may pertain to provision of services within the meaning of Section 2(zl A domain name is easy to remember and use, and is chosen as an instrument of commercial enterprise not only because it facilitates the ability of consumers to navigate the Internet to find websites they are looking for, but also at the same time, services to identify and distinguish the business itself, or its goods or services, and to specify its corresponding online internet location. Consequently a domain name as an address 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me is more than an internet address and is entitles to protection equal to a trademark. Gary Kremen vs. Stephen Michael Cohen et al. US Court of Appeal. Ninth Circuit (2003) 337 F.3d 1024 Perhaps the best depiction of the nature of the domain names and the right they enshrine upon the registrant has been made in the above case. In this case, the question before the Hon'ble Court was whether registrants have property rights in their domain names. The Hon'ble Court reversed the judgement of the District Court by applying a three- part test to determine whether a property right exists i.e. First, there must be an interest capable of precise definition: second, it must be capable of exclussive possession or control: and third, the putative owner must have established a legitimate claim to exclusivity. It was concluded by the Hon'ble Court that Domain names satisfy each criterion. Like a share of a corporate stock or a plot o f land, a domain name is a well-defined interest. Someone who registers 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existing ones and insert such names into the registry database (Cl.2.1 of Accreditation Agreement, p.84 of PB); iii. Right to cancel/de-activate the domain registrations/names in certain given situations like false declaration by the client, Non-renewal etc. (Cl. 3.7.5 of Accreditation Agreement, p.91 of PB Cl.2 10 of Domain Registration Agreement) iv. Right to Renew domain registration without explicit consent of the registrant.(Cl. 3.7.5.2 of Accreditation Agreement, p.91 Cl.3(B) of Domain Registration Agreement, P. 36 of PB) v. Right to suspend and put the registered domain names in Parked Site under certain given situations ( Cl.3(B) 10 of Domain Registration Agreement, P. 37 43 of PB); vi. Right to auction and transfer domain names; vii. Right to exploit the registered domain name to generate revenue in case of default by domain owner, before the domain returns to ICAAN, right to retain the same for a limited time in a parking site and 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on manually, but is not required to suspend any registration Accredation Agreement, P.120 of PB) d. Registrar shall verify the telephone number of the registered name holder by either calling or sending an SMS (Accredation Agreement, P.119 of PB) B. Web Hosting - Amount received for web-hosting (WHA) is a part of a single and composite processand can t be treated on a separate footing from that of Domain Name Registration. The appellant has already offered and need to be taxed Royalty/FTS; 6. We have heard both the parties and perused the material available on record. It is pertinent to note that this issue is already decided in favour of Revenue in assessee s own appeal and the contentions taken herein by the Ld. AR that the issue of ownership with whom it is applicable has also been dealt with in the said order The Tribunal held as under:- 8. We have carefully considered the arguments of both 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation 2. For the purposes of this clause, royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital gains ) for ( i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; ( ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; ( iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; ( iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; [( iva) the use or right to use any industrial, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elves. These decisions namely Rediff Communication Ltd. v. Cyberbooth and Anr., AIR (2000) Bombay 27, Yahoo Inc. v. Akash Arora, (1999) PTC 19 201, Dr. Reddy s Laboratories Ltd. v. Manu Kosuri, (2001) PTC 859 (Del.), Tata Sons Ltd. v. Manu Kosuri, (2001) PTC 432 (Del.), Acqua Minerals Ltd. v. Pramod Borse Anr., (2001) PTC 619 (Del.), and Info Edge (India) Pvt.Ltd. Anr. V. Shailesh Gupta Anr., (2002) 24 PTC 355 (Del.) correctly reflect the law as enunciated by us. No decision of any court in India has been shown to us which has taken a contrary view. The question formulated at the outset is therefore answered in the affirmative and the submission of the respondent is rejected. ( emphasis by underlining supplied by us) 11. That Hon ble Jurisdictional High Court in the case of Tata Sons Limited (supra) has also examined the identical question and held as under :- 6. In Yahoo Inc! Vs 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods and services are, and trade mark law applies to activities on Internet. ( emphasis by underlining supplied by us) 12. Learned counsel for the assessee has also relied upon the decision of Hon'ble Jurisdictional High Court in the case of Asia Satellite Telecommunications Co.Ltd. (supra). However, we find that the facts in that case were altogether different. In the said case, the assessee company carried on the business of private satellite communications and broadcasting facilities. During the relevant assessment year, it was the lessee of a satellite, called Asia-Sat 1 and was the owner of a satellite, called Asia Sat 2. Those satellites were launched by the assessee and were placed in a geostationary orbit in the orbital slots. Those satellites neither used the Indian orbital slots nor were they positioned over Indian airspace. However, the footprint area (the area of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rotection equal to a trademark. Hon'ble Jurisdictional High Court in the case of Tata Sons Limited (supra) held that domain names are entitled to protection as a trademark because they are more than an address. Respectfully following the above decisions of Hon ble Apex Court, Hon ble Bombay High Court and Hon'ble Jurisdictional High Court, we hold that the rendering of services for domain registration is rendering of services in connection with the use of an intangible property which is similar to trademark. Therefore, the charges received by the assessee for services rendered in respect of domain name is royalty within the meaning of Clause (vi) read with Clause (iii) of Explanation 2 to Section 9(1) of Income-tax Act. In view of the above, we uphold the orders of the lower authorities on this point and reject ground No.2 of the assessee s appeal. 13. Ground Nos.3 4 of the assessee 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 se ..... 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