2025 (1) TMI 449 - AT - Income Tax

Income taxable in India - Taxability of income from domain name registration services - royalty receipts - whether income from domain name registration services squarely fell within the definition of royalty as per section 9(1)(vi) of the Act as well as Article 12(3)(a) of India-USA DTAA - HELD THAT - Appellant being a Registrar is not the owner of domain name that it helps to register and does not hold any proprietorship rights in the names used domain names. This is affirmed by clause 3.5 of the Accreditation Agreement between the Appellant and ICANN and reference and clause 2 of the agreement between the Appellant and its customers was made. It was contended that in the absence of ownership over the domain names the Appellant cannot confer the right to use or transfer the right to use such domain names to another person / entity. Therefore the income earned by the Appellant from domain name registration services is not chargeable to tax in India as royalty under the provisions of section 9(1)(vi) of the Act as well as Article 12(3)(a) of India-USA DTAA. We find that this view has also been affirmed by Hon ble Delhi High Court in the Appellant s own case for AY 2013-14 to AY 2015-16 2023 (12) TMI 718 - DELHI HIGH COURT wherein vide order dated December 11 2023 it has been held that 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. DR could not cite before us any new or different set of facts for the present years to claim that the clauses of the relevant agreements are not identical to the years for which the above mentioned order was passed by the Hon ble Delhi High Court. Thus the ratio of the said decision should apply and the income earned by the Appellant from providing domain name registration services to Indian customers during the year under consideration cannot be held to be taxable in India under the provisions of section 9(1)(vi) of the Act as well as Article 12(3)(a) of India-USA DTAA. Ground no. 3 is sustained. Eligibility of assessee for benefit of DTAA and taxability of income from non-domain services such as web hosting web designing services etc. - AO has erred in giving a findings that being a LLP the assessee is not eligible for treaty benefits. 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 though the incidence of taxation and actual payment may be different. The reliance of the ld. counsel on the decision of Wild West Domains LLC 2024 (8) TMI 356 - ITAT DELHI certainly takes care of the issue wherein relying the decision of Linklaters LLP 2010 (7) TMI 535 - ITAT MUMBAI and Herbert Smith Freebills LLP 2022 (10) TMI 903 - ITAT DELHI the coordinate bench has given benefit of DTAA irrespective of the fact that the assessee in that case was fiscally transparent entity in USA like the present assessee. Accordingly ground No.2 is sustained in favour of the appellant. Income from provision of non-domain services (such as web hosting web designing services etc.) - A web host provides multiple web servers to host many different websites ensuring they are accessible on the internet. One can even set up a web site on two separate servers from two different hosting companies with the same domain just by ensuring that domain names are set up on both servers. A person may buy domain and hosting from different providers. It even has benefits like buying domains and hosting from different providers can give you more flexibility and control over your website as such person is able to choose the best provider for each service. It is sometimes more cost-effective as one may find better deals on either domain or hosting by shopping around. AO has fallen in error to consider web hosting charges and other non-domain services charges as FTS being ancillary and subsidiary to the application or enjoyment of domain name registration. The customized technology and services of the provider are fairly available to everyone who proceeds to acquire a domain name or pays for web hosting services. There is no transfer of any knowledge or know-how by the service provider which can deliver any enduring benefit to said person. In fact to make the website operational on the basis of ownership of a domain name and having services of web hosting the person creating a website has to independently engage its technological inputs which may be unique to the needs of that person in terms of the objectives of the website. Thus 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. 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. Ground no. 4 is sustained.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the income from domain name registration services is taxable as 'royalty' under section 9(1)(vi) of the Income Tax Act, 1961 and Article 12(3)(a) of the India-USA Double Taxation Avoidance Agreement (DTAA).
• Whether the income from non-domain services such as web hosting, web designing, and SSL certification is taxable as 'fees for technical services' (FTS) under section 9(1)(vii) of the Act and Article 12(4)(a) of the India-USA DTAA.
• Whether the appellant is eligible for benefits under the India-USA DTAA, considering its status as a Limited Liability Company (LLC) in the USA.
• Whether the levy of interest under sections 234A and 234B of the Act is justified.
• Whether the initiation of penalty proceedings under section 274 read with 271(1)(c) of the Act is valid.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability of Income from Domain Name Registration Services

• Relevant Legal Framework and Precedents: The primary legal question was whether the income from domain name registration services constitutes 'royalty' under section 9(1)(vi) of the Act and Article 12(3)(a) of the India-USA DTAA. The appellant argued that it does not own the domain names and thus cannot confer any right to use, which is a prerequisite for classifying income as 'royalty'. The appellant relied on previous judgments, including the Delhi High Court's decision in its own case for earlier assessment years, which supported this view.
• Court's Interpretation and Reasoning: The Tribunal agreed with the appellant's interpretation, noting that the appellant acts merely as a registrar and does not confer ownership rights over domain names. The Tribunal cited the Delhi High Court's decision affirming that the appellant's income from domain registration services does not qualify as 'royalty'.
• Key Evidence and Findings: The Tribunal relied on the accreditation agreement between the appellant and ICANN, which clarified the appellant's non-ownership of domain names.
• Application of Law to Facts: The Tribunal applied the legal principles to conclude that the income from domain name registration services is not taxable as 'royalty'.
• Treatment of Competing Arguments: The Tribunal dismissed the Revenue's arguments, emphasizing the lack of ownership and transfer of rights in domain names by the appellant.
• Conclusions: The Tribunal held that the income from domain name registration services is not taxable as 'royalty'.

Issue 2: Taxability of Income from Non-Domain Services

• Relevant Legal Framework and Precedents: The question was whether income from non-domain services is taxable as FTS under section 9(1)(vii) of the Act and Article 12(4)(a) of the India-USA DTAA. The Tribunal considered various precedents, including the decision in Millennium Infocom Technologies Ltd., which held that web hosting services do not constitute FTS.
• Court's Interpretation and Reasoning: The Tribunal found that the services did not meet the 'make available' criteria required for FTS under the DTAA. The services provided by the appellant did not result in the transfer of technical knowledge or skills to the users.
• Key Evidence and Findings: The Tribunal noted that the appellant's services were standardized and did not involve the transfer of technical knowledge.
• Application of Law to Facts: The Tribunal applied the 'make available' test and concluded that the income from non-domain services is not taxable as FTS.
• Treatment of Competing Arguments: The Tribunal rejected the Revenue's argument that the services were ancillary to domain registration, emphasizing the distinct nature of the services.
• Conclusions: The Tribunal held that the income from non-domain services is not taxable as FTS.

Issue 3: Eligibility for Benefits under the India-USA DTAA

• Relevant Legal Framework and Precedents: The Tribunal considered whether the appellant, as an LLC, is eligible for DTAA benefits. The Tribunal referred to the decision in Wild West Domains, LLC, which held that fiscally transparent entities could avail DTAA benefits with a valid Tax Residency Certificate (TRC).
• Court's Interpretation and Reasoning: The Tribunal found that the appellant was eligible for DTAA benefits, as the term 'liable to tax' indicates the power to tax, not actual tax payment.
• Key Evidence and Findings: The Tribunal relied on the appellant's valid TRC to support its eligibility for DTAA benefits.
• Application of Law to Facts: The Tribunal applied the principle that 'liability to taxation' differs from actual tax payment, supporting the appellant's eligibility.
• Treatment of Competing Arguments: The Tribunal dismissed the Revenue's argument that LLCs are not eligible due to their fiscal transparency.
• Conclusions: The Tribunal held that the appellant is eligible for benefits under the India-USA DTAA.

Issue 4: Levy of Interest under Sections 234A and 234B

• Relevant Legal Framework and Precedents: The Tribunal considered the statutory provisions for interest levy under sections 234A and 234B.
• Court's Interpretation and Reasoning: The Tribunal found that the interest levy was consequential to the primary findings on taxability.
• Conclusions: The Tribunal allowed the ground as consequential to its primary findings.

Issue 5: Initiation of Penalty Proceedings

• Relevant Legal Framework and Precedents: The Tribunal considered the initiation of penalty under section 274 read with 271(1)(c).
• Court's Interpretation and Reasoning: The Tribunal found the initiation of penalty proceedings to be mechanical and without basis.
• Conclusions: The Tribunal allowed the ground, finding the penalty initiation unjustified.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: The Tribunal quoted the Delhi High Court's decision: "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."
• Core Principles Established: The Tribunal reinforced the principle that domain registration services do not constitute 'royalty' and that non-domain services do not meet the 'make available' test for FTS under the DTAA.
• Final Determinations on Each Issue: The Tribunal ruled in favor of the appellant on all grounds, holding that the income from domain and non-domain services is not taxable as 'royalty' or FTS, and that the appellant is eligible for DTAA benefits. The interest levy and penalty initiation were also found to be unjustified.