2023 (12) TMI 718 - HC - Income Tax

Income accrued in India - Royalty receipts - income received by the appellant as a consideration for providing domain name registration services - Appellant/assessee is a US-based company and is an accredited registrar for the Internet Corporation for Assigned Names and Numbers (ICANN) - HELD THAT - What is agreed between the appellant/assessee and its customers is that mere registration of a domain name does not create any proprietorship rights in the name used as the domain name or in the domain name registration either in the appellant/assessee or the customers or even any other third party. Therefore, the submission advanced on behalf of the appellant/assessee, i.e., that since it is not the domain name's owner, it cannot confer the right to use or transfer the right to use the domain name to another person/entity, deserves acceptance. We are also of the view that passing off and injunction actions are entertained by the courts where domain name registrations are brought about in bad faith or to perpetuate fraud. The courts tend to grant injunctive relief where the defendant, in such actions, is seen to be feeding off the plaintiff's goodwill and causing confusion amongst its customers regarding the origin of the subject goods and services. Such reliefs are granted on the basis that the definition of the expression mark includes a name , and in turn, the expression trademark so defined to include a mark, distinguishes the goods and services of one person from those of others. Therefore it is possible in a given situation that a domain name may have the attributes of a trademark. See Section 2m read with Section 2zb of Trademarks Act, 1999 . The Supreme Court, in Satyam Infoway 2004 (5) TMI 529 - SUPREME COURT held that it is the registrant (and not the Registrar) who owns the domain name, and can protect its goodwill by initiating passing off action against a subsequent registrant of the same domain name/a deceptively similar domain name. SC was concerned only with the rights of the domain name owner and not the Registrar, while determining whether passing off action can be initiated in relation to domain names. Given this position, the Tribunal s reliance on this judgment is misconceived. In this case, however, we need not travel down this path, as the appellant/assessee is only acting as a Registrar and thus offering its services to its customers for having their domain names registered.The aforementioned principle may have been attracted if the appellant/assessee had granted rights in or transferred the right to use its domain name, i.e., Godaddy.com, to a third person. Therefore, the fee received by the appellant/assessee for registration of domain names of third parties, i.e., its customers, cannot be treated as royalty. We are of the view that the question of law has to be answered in favour of the appellant/assessee and against the respondent/revenue.

Summary

Issues Involved:
1. Whether the income received by the appellant for providing domain name registration services amounts to 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961.

Summary:

Issue 1: Whether the income received by the appellant for providing domain name registration services amounts to 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961.

The common question of law framed for consideration was whether the Income Tax Appellate Tribunal (Tribunal) erred in holding that the income received by the appellant for providing domain name registration services amounted to 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961.

The appellant, a US-based company and an ICANN accredited registrar, provides domain name registration, website design, and web hosting services. The appellant charges a fee for facilitating domain name registration, which is shared among the appellant, ICANN, and the registry. The appellant argued that it does not transfer any right to use the domain name to the customer, who is the registrant and owner of the domain name. The Tribunal, however, equated domain names to trademarks and concluded that the consideration received was in the nature of royalty.

The court noted that the appellant does not have a permanent establishment in India and the dispute was confined to the consideration received for domain name registration services. The appellant facilitates the registration and transfer of domain names and does not have ownership rights in the domain names registered. The court emphasized that the appellant, acting as a registrar, does not confer the right to use or transfer the right to use the domain name to another entity.

The court further observed that passing off and injunction actions are entertained where domain name registrations are made in bad faith or to perpetuate fraud. The Supreme Court in Satyam Infoway held that it is the registrant who owns the domain name and can protect its goodwill by initiating passing off actions. The Tribunal's reliance on this judgment was deemed misconceived as the appellant is only a registrar, not the owner of the domain name.

Consequently, the court concluded that the fee received by the appellant for domain name registration services cannot be treated as royalty. The question of law was answered in favor of the appellant, and the appeals were allowed.