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TMI Blog2023 (1) TMI 365X X X X Extracts X X X X X X X X Extracts X X X X ..... eal for the assessment year 2017-18 is taken up as a lead case. ITA no.1855/Mum./2022 Assessee's Appeal - A.Y. 2017-18 3. In its appeal, the assessee has raised following grounds:- "On the facts, and in the circumstances of the case, and in law, the Appellant craves to prefer an appeal against the order dated 31 May 2022 passed by the Deputy Commissioner of Income- tax (Int. Tax)-3(3)(2) (hereinafter referred to as the 'learned AO) under Section 143(3) read with Section 144C(13) of the Income-tax Act, 1961 on the grounds as set out herein: The following grounds are independent of, and without prejudice to, one another: GROUND 1: OBJECTION AGAINST ADDITION ON ACCOUNT OF INCOME FROM DOMAIN REGISTRATION SERVICES On the facts and circumstances of the case and in law, the Assessing Officer (AO) erred in alleging that income from Domain Name Registration services is taxable as 'Royalty' under Section 9(1)(vi) of the Income Tax Act, 1961 (Act') and under the India- UAE treaty (tax treaty"). ). The AO based on his conclusion contended that the Appellant is the owner of the domain name and is imparting the right to use in respect of a domain name thus erroneously ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is incorporated in United Arab Emirates ('UAE') and is a tax resident of UAE. The assessee is engaged in the business of web presence, and sale of domain names to global customers through its B2B brands 'Logic Boxes', 'Reseller Club', and B2C brand 'Big Rock'. The B2B business represents the sale of domain names to domain name resellers, whereas B2C represents the sale of domains to third-party ultimate customers. The business of the assessee also comprises of providing web hosting services whereby server spaces are given on lease/hire to clients. For the year under consideration, the assessee e-filed its return of income on 30/11/2017 declaring a total income of Rs. 8,10,94,810. The return of income filed by the assessee was selected for scrutiny and statutory notices under the Act were issued. In view of the international transactions entered into by the assessee with its associated enterprises, reference was made to the Transfer Pricing Officer for the determination of arm's length price in respect of the said international transactions. The Transfer Pricing Officer drew no adverse inference in respect of the international transactions undertaken by the assessee during the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Regional Transport Authority. It was further submitted that in the event of trademark infringement suits filed by parties with regard to the use of domain names with mala fide intention, the Registrars/Reseller cannot be sued since they did not have any right in the domain name which was registered by them as a mere facilitator. 7. The AO vide draft assessment order dated 26/09/2021 passed under section 143(3) of the Act did not agree with the submissions of the assessee and held that domain name registration is taxable in India as royalty because domain name is an 'intangible asset' in the nature of 'trademark'. The AO further held that the assessee is giving the client right to use its domain name for a fixed period and for a fixed amount of time. Further, the assessee is not selling the domain name but registering or renewing it, which clearly indicates that the assessee as a domain name services provider is the owner of the domain name and it is only providing the right to use the domain name to its clients. Accordingly, the AO treated the sum of Rs. 27,41,96,969 received by the assessee on account of domain name registration as royalty under the provisions of the Act as we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. Organisations can choose a domain name that corresponds to their name, helping internet users to reach them easily. Thus, with the domain name, an organisation named ABC can state its website as 'abc.com' instead of 123.876.321/abc/. 12. The domain name registration process involves ICANN, Registry, Registrar, and Reseller. The role of each party in this process is as under: (a) ICANN is an organisation charged with overseeing the name and number systems of the Internet. In addition to ICANN, each Top-Level Domain ('TLD') is maintained and serviced technically by an administrative organisation operating a registry. (b) The Registry is responsible for maintaining the database of names registered with the TLD it administers. ICANN manages the TLD with the help of hundreds of domain name Registries spread throughout the world. Each of these Registries is certified by and subject to the direct supervision of ICANN. The role of the Registry operators within the internet ecosyst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... customer does not renew the registration then the same domain name would be available to another customer to be registered in its name. Such registration can also be done through a different Registrar for the same domain name. The purpose of registration of a domain name is primarily to have exclusivity of domain name vis-à-vis the customer during the period of registration since the internet allows for access to the domain name without any geography limitation. Thus, the domain name is registered on a first-come-first-serve basis. However, in this entire process, the only person who can claim the right over the domain name can only be the customer. As the activity of the Registrar does not result in transferring of any right in the domain name since its scope of activities is restricted only to facilitate the registration of the domain name after checking its availability in the database maintained by the Registry, under the supervision of ICANN. 14. In the present case, the 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'. In order to come to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a team of person scanning and checking every domain name application betrays a wholesale lack of understanding of how domain name registration actually works. Thus, the registration will continue until suspension or expiry. 16. Therefore, from the above, it is evident that apart from acting as an intermediary in the entire process of domain name registration, the Registrar has no other role to play. Thus, it cannot be held that the assessee functioning as a domain name Registrar had any right in the domain name registered in the name of the customer/registrant, least intellectual property right/intangible asset in the nature of 'trademark'. In the present case, there is no dispute regarding the fact that the assessee is a resident of UAE and therefore the assessee is entitled to the provisions of the India UAE DTAA. The Tax Residency Certificate ('TRC') for the year under consideration also forms part of the paper book filed by the assessee. Under Article 12(3) of the India UAE DTAA, the term 'royalty' has been defined as under: "3. The term "royalties" as used in this Article means payment of any kind received as a consideration for the use of, or the right to use, any copyr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y servers either owned or leased. The assessee further submitted that the consideration paid is for the use of the server space, and the customers neither have an independent right to use the server space nor have any 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. The AO vide draft assessment order did not agree with the submissions of the assessee and held that customers of the assessee are using the server of the assessee and paying the fees for the same. The AO further held that web hosting is interlinked with the domain name and therefore the amount received by the assessee in respect of web hosting/data centre services is in nature of royalty under the Act as well as under the provisions of the India UAE DTAA. Accordingly, the AO made an addition of Rs. 3,05,20,419 to the total income of the assessee. 20. The assessee filed detailed objections before the learned DRP, inter-alia, against the addition made by the AO. Vide directions dated 07/03/2022, issued under section 144C(5) of the Act, the learned DRP rejected the objections filed by the assessee and held that web hosting services is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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. Further, we find 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. 24. The issue arising in ground No. III, raised in assessee's appeal, is pertaining to the addition on account of sponsorship income. 25. The brief facts of the case pertaining to this issue are: During the year under consideration, the assessee received sponsorship income of Rs. 64,91,659 for conducting two days conference in India. As per the assessee, the event was primarily organised to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Revenue. We find that vide its submission dated 09/03/2021, the assessee provided the details of sponsorship to the AO, which forms part of the paper book on page 69. However, without commenting on the same, the AO made the impugned addition. In further proceedings, the learned DRP directed the AO to pass a speaking order with regard to the existence of assessee's permanent establishment in India. At the outset, it is pertinent to note that 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. 30. Even on merits, we find that 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for further consideration, thus it cannot be classified as the trademark and cannot be termed as "Royalty" GROUND II: OBJECTION AGAINST ADDITION ON ACCOUNT OF INCOME FROM WEB HOSTING SERVICES On the facts and circumstances of the case and in law, the Assessing Officer ('AO') erred in proposing that income from web hosting services is taxable as 'Royalty' under Section 9(1)(vi) of the Income Tax Act, 1961 (Act') and under the India- UAE treaty (tax treaty') in the absence of any physical access or control or possession or independent right being granted by the appellant to the payer. The Assessing Officer ('AO') erred in concluding that the income from web hosting is interlinked to income from domain registration services and considered as royalty despite the fact that the said services are mutually exclusive and independent. GROUND III: OBJECTION AGAINST ADDITION ON ACCOUNT OF SPONSORSHIP INCOME On the facts and circumstances of the case and in law, the Assessing Officer (AO) erred in concluding that the assessee did not provide substantial documents and information regarding the treatment of sponsorship and other income, as a business inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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