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

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• The eligibility of the appellant to avail benefits under the India-USA Double Taxation Avoidance Agreement (DTAA).
• The taxability of income from domain name registration services as 'royalty' under the Income Tax Act and the India-USA DTAA.
• The taxability of income from non-domain services, such as web hosting, web designing, and SSL certification, as fees for technical services (FTS) under the Income Tax Act and the India-USA DTAA.
• The applicability of interest under sections 234A and 234B of the Income Tax Act.
• The initiation of penalty proceedings under section 274 read with 271(1)(c) of the Income Tax Act.

2. ISSUE-WISE DETAILED ANALYSIS

Eligibility to Avail Benefit Under India-USA Tax Treaty

• Relevant Legal Framework and Precedents: The DTAA between India and the USA, particularly Article 4, which defines 'resident' for treaty purposes. The case of Wild West Domains, LLC vs ACIT was referenced, establishing that fiscally transparent entities can benefit from the DTAA if a valid Tax Residency Certificate (TRC) is issued.
• Court's Interpretation and Reasoning: The tribunal found that the appellant, being a fiscally transparent entity in the USA, is entitled to DTAA benefits provided a TRC is available.
• Key Evidence and Findings: The appellant provided a TRC, and the tribunal noted the precedent set by the Wild West Domains case.
• Application of Law to Facts: The tribunal applied the precedent to determine that the appellant is eligible for DTAA benefits.
• Treatment of Competing Arguments: The tribunal rejected the Revenue's argument that the appellant is not a 'resident' under the DTAA due to its fiscal transparency.
• Conclusions: The appellant is entitled to DTAA benefits, and the denial by the AO was incorrect.

Taxability of Income from Domain Name Registration Services

• Relevant Legal Framework and Precedents: Section 9(1)(vi) of the Income Tax Act and Article 12(3)(a) of the India-USA DTAA. The Delhi High Court's decision in the appellant's case for previous years was pivotal.
• Court's Interpretation and Reasoning: The tribunal followed the Delhi High Court's decision, which held that income from domain name registration does not constitute 'royalty'.
• Key Evidence and Findings: The appellant is not the owner of the domain names and cannot confer usage rights, negating the 'royalty' classification.
• Application of Law to Facts: The tribunal applied the High Court's reasoning to the current assessment years.
• Treatment of Competing Arguments: The tribunal found no new facts or arguments from the Revenue to deviate from the High Court's decision.
• Conclusions: Income from domain name registration is not taxable as 'royalty'.

Taxability of Income from Non-Domain Services

• Relevant Legal Framework and Precedents: Section 9(1)(vii) of the Income Tax Act and Article 12(4) of the India-USA DTAA. The tribunal referenced multiple cases, including Millennium Infocom Technologies Ltd. and Amazon Web Services, Inc.
• Court's Interpretation and Reasoning: The tribunal concluded that non-domain services do not 'make available' technical knowledge as required under Article 12(4)(b) of the DTAA.
• Key Evidence and Findings: The services provided do not enable the recipient to use the technical knowledge independently.
• Application of Law to Facts: The tribunal applied the 'make available' test and found the services did not meet the criteria.
• Treatment of Competing Arguments: The tribunal rejected the AO's classification of these services as FTS due to the lack of technical knowledge transfer.
• Conclusions: Income from non-domain services is not taxable as FTS.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "The 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 reasoning was pivotal in determining the non-taxability of domain registration income as 'royalty'.
• Core Principles Established: The principle that fiscally transparent entities can benefit from the DTAA if a TRC is available, and that domain registration services do not constitute 'royalty' income.
• Final Determinations on Each Issue: The tribunal ruled in favor of the appellant on all significant issues, granting DTAA benefits and determining that neither domain registration nor non-domain services income is taxable under the provisions cited by the AO.