Fees received for domain name registration are taxable as ...
10 April 2018
Fees received for domain name registration are taxable as royalty under Section 9(1)(vi) of the Income-tax Act
Background
The Delhi Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of LLC1 (the taxpayer) held that the rendering of services for domain registration amounts to use of an intangible property which is similar to trademark. Therefore, the fees received for such services are taxable as royalty under Section 9(1)(vi) of the Income-tax Act, 1961 (the Act).
Facts of the case
The taxpayer is a Limited Liability Company
(LLC) located in the U.S. It is engaged in the business as accredited domain name registrar authorised by Internet Corporation for Assigned Names and Numbers (ICANN). The taxpayer is a registrar of the customers who need these services and provide the services to its customers. ICANN is the central organisation who appoints a registrar like taxpayer and charges fee under a fixed predetermined formula.
As per the agreement between the taxpayer
and ICANN, the taxpayer has the right to register, assign, transfer and manage specific domain names. The clients all over the world apply for services as per proforma given by the taxpayer and pay fees for the same. One part of the fees is allegedly received by the taxpayer for web-hosting which is being offered for tax as royalty and the other part is taken for domain name registration.
A domain name is an identification string that
defines a realm of administrative autonomy, authority or control within the internet. Domain name used in various networking contexts and application-specific naming and addressing purposes. It represents an Internet Protocol (IP) resource, such as a personal computer used to access the internet, a server computer hosting a website, the web site itself or any other service communicated via the internet.
The functions performed by ICANN and the
taxpayer are as follows:
The clients desirous of services apply to the taxpayer who in turn enquires from ICANN availability of domain name.
On confirmation, the taxpayer registers the clients for fees and for conditions as imposed by ICANN.
A technical coordinating body, ICANN performs a variety of functions related to the internet's unique identifiers. These include operational functions, collaboration, coordination and engagement.
During the Assessment Year 2013-14, the
taxpayer received income from domain registration fees which was claimed to be not taxable in India.
____________________ 1 LLC v. ACIT (ITA No. 1878/Del/2017) ?
? 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
The Assessing Officer (AO) observed that the
customers of the taxpayer are using the server of the taxpayer and paying the fees for the same. The domain name registration is a tool which equips the customer with the right to use the server of the taxpayer. The domain registration charges have been essentially charged for granting right to use the servers of the taxpayer, domain registration being the precondition to web hosting, etc., and same being a highly technical process and because of its inherent quality, the same squarely falls under the definition of royalty under the provisions of the Act. Accordingly, the domain registration charges are taxable as royalty under Section 9(1)(vi) the Act.
The Dispute Resolution Panel (DRP) upheld the
finding of the AO.
Tribunal's decision
The Tribunal clarified that since the taxpayer
himself contended that it is not a tax resident of the U.S., it is not entitled to claim any benefit under the India-U.S. tax treaty. Accordingly, the matter has been examined in light of Section 9(1)(vi) of the Act.
The Tribunal observed that the Supreme Court
has already considered a similar aspect in the case of Satyam Infoway Ltd2. The question before the Supreme Court was whether internet domain names are subject to the legal norms applicable to other intellectual properties such as trademarks. The Supreme Court observed that a domain name may have all the characteristics of a trademark and found an action for passing off. The Supreme Court has held that the domain name is a valuable commercial right and it has all the characteristics of a trademark and accordingly, it was held that domain names are subject to legal norms applicable to trademark.
The Delhi High Court in the case of Tata Sons
Limited3 has held that the internet domain names are of importance and can be a valuable corporate asset and such domain name is more than an internet address and is entitled to protection equal to a trade mark. With the advent of modern technology particularly that relating to cyberspace, domain names or internet sites are entitled to protection as a trademark because they are more than a mere address. The rendering of internet services is also entitled to protection in the same way as goods and services are, and trademark law applies to activities on the internet.
The decision of the Delhi High Court in the
case of Asia Satellite Telecommunications Co. Ltd4. relied on by the taxpayer is distinguishable on facts of the present case. In the said case, the taxpayer carried on the business of private satellite communications and broadcasting facilities. The role of the taxpayer in this cycle was that of receiving the signals, amplifying them and after changing frequency relaying them over the entire footprint area. For that service, the TV channels made payments to the taxpayer. The question before the High Court was whether such payments can be said to be royalty chargeable to tax in India. The High Court answered the question in the negative.
The ruling of the AAR in the case of Dell
International Services (India) Private Limited5 is also distinguishable on the facts of the present case. In that case also, the issue before the AAR was whether the payment for providing communication through telecom bandwidth can be termed as royalty within the meaning of Section 9(1)(vi) of the Act.
The issue before the Bombay High Court in
the case of Rediff Communications Ltd.6 was whether domain names can be considered as intellectual properties such as trademark. The High Court held that domain names are of importance and can be a valuable corporate asset and such domain name is more than an internet address and is entitled to protection equal to a trademark.
Based on the above decisions of the
Supreme Court and other High Courts7, the Tribunal held that the rendering of services for domain registration is rendering of services in connection with the use of an intangible property which is similar to trademark. Therefore, the charges received by the taxpayer for services rendered in respect of domain name is royalty within the meaning of Section9 (1)(vi) read with Clause (iii) of Explanation 2 of the Act.
Our comments
The issue with respect to taxation of royalty vis?-vis IPR and its related services has been a matter of debate. The Bangalore Tribunal in the case of Google India Private Limited8 observed that Google Ireland Ltd (GIL) is allowing Google India access to all intellectual property and confidential information which is used by Google India for activities related to distribution agreement. Google India also has right,
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2 Satyam Infoway Ltd. v. Siffynet Solutions Pvt Ltd [2004] Supp (2) SCR 465 (SC) 3 Tata Sons Limited v. Mr. Manu Kishori & Ors 90 (2001) DLT 659 (Del)
4 Asia Satellite Telecommunications Co.Ltd. v. DIT [2011] 197 Taxman
263 (Del) 5 Dell International Services (India) Private Limited [2008] 218 CTR
209 (AAR) 6 Rediff Communications Ltd AIR 2000 Bombay 27 7 Tata Sons Limited v. Mr. Manu Kishori & Ors. 90 (2001) DLT 659
(Del), Rediff Communications Ltd AIR 2000 Bombay 27 8 Google India Private Ltd. v. ACIT [2017] 86 237 (Bang)
? 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
title and interest over the intellectual property right of Google. IP of Google vests in the search engine technology, associated software and other features, and hence use of these tools for performing various activities, including accepting advertisements, providing before or after sale services, clearly fall within the ambit of royalty. In the instant case, the Delhi Tribunal based on peculiar facts of the case held that the rendering of services for domain registration is rendering of services in connection with the use of an intangible property which is similar to trademark. Therefore, the fees received by the taxpayer for services rendered in respect of domain name is taxable as royalty under Section 9(1)(vi) of the Act.
? 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
in
Ahmedabad Commerce House V, 9th Floor, 902 & 903, Near Vodafone House, Corporate Road, Prahlad Nagar, Ahmedabad ? 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244
Bengaluru Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bengaluru ? 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999
Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh ? 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780
Chennai KRM Tower, Ground Floor, No 1, Harrington Road Chetpet, Chennai ? 600 031 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999
Gurugram Building No.10, 8th Floor DLF Cyber City, Phase II Gurugram, Haryana ? 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101
Hyderabad Salarpuria Knowledge City, ORWELL, 6th Floor, Unit 3, Phase III, Sy No. 83/1, Plot No 2, Serilingampally Mandal, Raidurg Ranga Reddy District, Hyderabad, Telangana ? 500081 Tel: +91 40 6111 6000 Fax: +91 40 6111 6799
Jaipur Regus Radiant Centres Pvt Ltd., Level 6, Jaipur Centre Mall, B2 By pass Tonk Road Jaipur, Rajasthan, 302018. Tel: +91 141 - 7103224
Kochi Syama Business Center 3rd Floor, NH By Pass Road, Vytilla, Kochi ? 682019 Tel: +91 484 302 7000 Fax: +91 484 302 7001
Kolkata Unit No. 603 ? 604, 6th Floor, Tower ? 1, Godrej Waterside, Sector ? V, Salt Lake, Kolkata ? 700 091 Tel: +91 33 4403 4000 Fax: +91 33 4403 4199
Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai ? 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000
Noida Unit No. 501, 5th Floor, Advant Navis Business Park Tower-B, Plot# 7, Sector 142, Expressway Noida, Gautam Budh Nagar, Noida ? 201305 Tel: +91 0120 386 8000 Fax: +91 0120 386 8999
Pune 9th floor, Business Plaza, Westin Hotel Campus, 36/3-B, Koregaon Park Annex, Mundhwa Road, Ghorpadi, Pune ? 411001 Tel: +91 20 6747 7000 Fax: +91 20 6747 7100
Vadodara iPlex India Private Limited, 1st floor office space, No. 1004, Vadodara Hyper, Dr. V S Marg Alkapuri, Vadodara ? 390 007 Tel: +91 0265 235 1085/232 2607/232 2672
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
? 2018 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
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