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2023 (1) TMI 365 - AT - Income TaxAddition on account of income from domain registration services - Royalty receipt - whether the income earned by the assessee, who is a Registrar, from domain name registration will be taxable as royalty under the provisions of the Act or DTAA? -AO has treated the amount received from domain name registration taxable in India as royalty on the basis that the domain name is an intangible asset in the nature of trademark - HELD THAT - Domain name is an internet network address that is readable in human language. Domain names are formed by the rules and procedures of the Domain Name System ( DNS ). Any name registered in the DNS is a domain name. In general, a domain name represents an Internet Protocol ( IP ) resource. 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. We are of the considered opinion that since the assessee had no right in the domain name, the income received by the assessee from domain name registration does not fall in the category of royalty as defined under Article 12(3) of the India UAE DTAA. Further, once the taxability fails in terms of the treaty provisions, there is no occasion to refer to the provisions of the Act, as in terms of section 90(2) the provisions of the Act or the DTAA, whichever is more beneficial to the assessee shall be applicable. Decision of Godaddy.com 2018 (4) TMI 390 - ITAT DELHI relied upon by the AO, is factually distinguishable as in that case the taxpayer did not claim any benefit under the tax treaty. Hence, the AO is directed to delete the addition on account of income from domain registration services. Accordingly, ground No. I raised in assessee s appeal is allowed. Addition on account of income from web hosting services - independent right to use the server space - HELD THAT - As per the assessee, the consideration paid is for use of the server space and the customers neither have an independent right to use the server space nor have 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. We find that the term royalty is not as widely defined in the India UAE DTAA as the same has been defined under the provisions of the Act. After the insertion of Explanation 5 to section 9(1)(vi) of the Act by Finance Act 2012, the possession or control or location of the right, property, or information is not relevant under 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 (2) TMI 415 - 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 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. Addition on account of sponsorship income - Directions issued by the DRP to the AO to pass a speaking order - HELD THAT - As 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 Act. Earning sponsorship income from the sponsors was consequential to the advertising event in the 2 days conference. In the present case, there cannot be any dispute that organising such an event is not the core business activity of the assessee - under Article 5 of India UAE DTAA, the term permanent establishment means of a fixed place of business through which the business of an enterprise is wholly or partly carried on. In the present case, firstly mere conducting of a conference only for 2 days in India cannot be said to be a fixed place of business, and secondly, as noted above conducting a conference is not the core business activity of the assessee. Even if, at all, it can only be considered to be in the nature of the preparatory or auxiliary activity, which has been specifically excluded from the definition of permanent establishment under Article 5(3) of the India UAE DTAA. In absence of the permanent establishment of assessee in India, the sponsorship income cannot be taxed in India as business income. Accordingly, in view of aforesaid findings, the AO is directed to delete the addition on account of sponsorship income. As a result, ground No. III raised in assessee s appeal is allowed.
Issues Involved:
1. Addition on account of income from domain registration services. 2. Addition on account of income from web hosting services. 3. Addition on account of sponsorship income. Detailed Analysis: Issue 1: Addition on Account of Income from Domain Registration Services Facts: The assessee, a UAE resident, engaged in web presence and domain name sales, declared income from domain registration services. The AO treated this income as 'royalty' under Section 9(1)(vi) of the Income Tax Act and the India-UAE DTAA, considering domain names as 'trademarks'. Assessee's Argument: The assessee argued that it merely facilitated domain name registration as an ICANN-accredited Registrar and did not own the domain names. Therefore, it could not transfer any rights, and the income should not be classified as 'royalty'. AO's Position: The AO contended that domain registration services involved granting the right to use domain names, which were intangible assets akin to trademarks, thus qualifying as 'royalty'. Tribunal's Findings: The Tribunal observed that domain names are internet addresses managed by Registries under ICANN's supervision. The Registrar, including the assessee, acts as an intermediary without owning the domain names. The Tribunal held that the assessee's role did not involve transferring any rights in the domain names, thus the income did not qualify as 'royalty' under the India-UAE DTAA. Consequently, the addition was deleted. Conclusion: The Tribunal directed the AO to delete the addition on account of income from domain registration services, allowing the assessee's appeal on this ground. Issue 2: Addition on Account of Income from Web Hosting Services Facts: The assessee earned income from providing web hosting services, which the AO treated as 'royalty' under the Income Tax Act and the India-UAE DTAA, arguing that web hosting was interlinked with domain registration services. Assessee's Argument: The assessee contended that it provided server space without granting independent rights or physical access to customers. The income was for server space usage, not for the right to use technology or platforms. AO's Position: The AO maintained that web hosting services involved granting valuable rights to access servers, thus constituting 'royalty'. Tribunal's Findings: The Tribunal noted that the term 'royalty' under the India-UAE DTAA was not as broad as under the Income Tax Act. Since the customers did not gain control over the servers, the income from web hosting services did not qualify as 'royalty' under the DTAA. The Tribunal also rejected the AO's linkage of web hosting income with domain registration services, as both were independent activities. Conclusion: The Tribunal directed the AO to delete the addition on account of income from web hosting services, allowing the assessee's appeal on this ground. Issue 3: Addition on Account of Sponsorship Income Facts: The assessee received sponsorship income for a two-day conference in India. The AO added this income to the total income, treating it as business income due to the existence of a Permanent Establishment (PE) in India. Assessee's Argument: The assessee argued that the conference was a one-time event for advertising and educating customers, not a core business activity. In the absence of a PE in India, the income should not be taxed as business income under the India-UAE DTAA. AO's Position: The AO, following the DRP's directions, held that the assessee had a PE in India and the sponsorship income was taxable as business income. Tribunal's Findings: The Tribunal found that conducting a two-day conference did not constitute a fixed place of business or a core business activity, thus not creating a PE in India. The Tribunal also noted that the DRP's direction to the AO to pass a speaking order on the existence of a PE was contrary to Section 144C(8) of the Act. Conclusion: The Tribunal directed the AO to delete the addition on account of sponsorship income, allowing the assessee's appeal on this ground. Overall Conclusion: Both appeals by the assessee for the assessment years 2017-18 and 2018-19 were allowed, with the Tribunal directing the deletion of additions on account of income from domain registration services, web hosting services, and sponsorship income.
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