Godaddy.com LLC Vs. ACIT (ITAT Delhi)
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 assessee for services rendered in respect of domain name is royalty within the meaning of Clause (vi) read with Clause (iii) of Explanation 2 to Section 9(1) of Income-tax Act.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
This appeal by the assessee for the assessment year 2013-14 is directed against the order of learned Dispute Resolution Panel-1, New Delhi dated 23rd December, 2016.
2. Ground No. 1 of the assessee’s appeal, which reads as under, is of general nature and needs no separate adjudication :-
“That on the facts and in the circumstances of the case and in law, the impugned order of assessment framed by the AO pursuant to the directions of the DRP is erroneous and bad in law as well as in facts.”
3. Ground No.2 of the assessee’s appeal reads as under :-
“That on the facts and in the circumstances of the case and in law, the AO/DRP has wrongly alleged that receipts from domain name registration amounting to INR 174,154,636 should be charged to tax as royalty as per the provisions of section 9(1)(vi) read with section 115A of the Act.”
4. The facts of the case are that the assessee is a limited liability company located in the USA. It is engaged in the business as accredited domain name registrar authorized by Internet Corporation for Assigned Names and Numbers (in short ‘ICANN’). For the year under consideration, the assessee filed return declaring income of `20,42,77,864/- being the receipt from web hosting services/on demand sale. The assessee offered the same as income from royalty. However, the Assessing Officer assessed the same as fees for technical services which is affirmed by learned DRP. Though the assessee has raised ground Nos. 3 & 4 against the action of the Assessing Officer assessing the income from web hosting services as FTS, as against royalty income declared by the assessee, such grounds are not pressed at the time of hearing. In addition to above, the assessee had income from domain registration fees amounting to `17,41,54,636/-, which is claimed to be not taxable in India. The Assessing Officer assessed the same as income from royalty. The relevant finding in this regard in paragraph Nos.6 to 6.5 of his order reads as under :-
“6. Domain Name Registration as Royalty
6.1 What is domain name
The domain name is much like an entry in a phone book. Computers communicate by using numbers, called IP addresses, to contact each other, much like we use a phone number to dial a specific person’s phone. If we want people to find our business’s phone number, we want to be listed in a phone book. The phone book tells people looking for our phone number “Company A’s phone number is xxx-xxx-xxxx” just as a domain tells people (i.e. their computers) “domainA.com is hosted on the server xxx.xxx.xxx.xxx” without the domain, we would have to tell our customers “Hey my site is located at 123.456.789.123/~mysite/” instead of “mysite.com” we can see how, without a domain, having a site or hosting is impractical.
6.2 What is the procedure for registering a domain name
A domain name is an identification string that defines a realm of administrative autonomy, authority or control within the Internet. Domain names are formed by the rules and procedures of the Domain Name System (DNS). Any name registered in the DNS is a domain name. Domain names can also be thought of as a location where certain information or activities can be found.
Domain names are used in various networking contexts and application-specific naming and addressing purposes. In general, a domain name represents an Internet Protocol (IP) resource, such as a personal computer used to access the Internet, a server computer hosting a web site, the web site itself or any other service communicated via the Internet.
Domain names are organized in subordinate levels (sub domains) of the DNS root domain, which is nameless. The first-level set of domain names are the top-level domains (TLDs), including the generic top-level domains (gTLDs), such as the prominent domains com, info, net, edu, and org, and the country code top-level domains (ccTLDs). Below these top-level domains in the DNS hierarchy are the second-level and third-level domain names that are typically open for reservation by end-users who wish to connect local area networks to the Internet, create other publicly accessible Internet resources or run web sites. The registration of these domain names is usually administered by domain name registrars who sell their services to the public.
A fully qualified domain name (FQDN) is a domain name that is completely specified in the hierarchy of the DNS, having no parts omitted.
Labels in the Domain Name System are case-insensitive and may therefore be written in any desired capitalization method, but most commonly domain names are written in lowercase in technical contexts.
Technical requirements and process
In the process of registering a domain name and maintaining authority over the new name space created, registrars use several key pieces of information connected with a domain :
Administrative contact. A registrant usually designates an administrative contact to manage the domain name. The administrative contact usually has the highest level o f control over a domain. Management functions delegated to the administrative contacts may include management of all business information, such as name of record, postal address, and contact information of the official registrant of the domain and the obligation to conform to the requirements of the domain registry in order to retain the right to use a domain name. Furthermore, the administrative contact installs additional contact information for technical and billing functions.
Technical contact. The technical contact manages the name servers of a domain name. The functions of a technical contact include assuring conformance of the configurations of the domain name with the requirements of the domain registry, maintaining the domain zone records, and providing continuous functionality of the name servers (that leads to the accessibility of the domain name).
Billing contact. The party responsible for receiving billing invoices from the domain name registrar and paying applicable fees.
Name servers. Most registrars provide two or more name servers as part of the registration service. However, a registrant may specify its own authoritative name servers to host a domain’s resource records. The registrar’s policies govern the number of servers and the type o f server information required. Some providers require a host name and the corresponding IP address or just the host name, which must be resolvable either in the new domain, or exist elsewhere. Based on traditional requirements (RFC 1034), typically a minimum of two servers is required.
Domain names may be formed from the set o f alphanumeric ASCII characters (a-z, A-Z, 0-9), but characters are case-insensitive. In addition the hyphen is permitted if it is surrounded by characters, digits or hyphens, although it is not to start or end a label. Labels are always separated by the full stop (period) character in the textual name representation.
6.3 What are the functions performed by ICANN and what are the functions performed by Go Daddy in the procedure
As a technical coordinating body, ICANN (Internet Corporation for Assigned Names and Numbers) performs a variety of functions related to the Internet’s unique identifiers. These include operational functions, collaboration, coordination and engagement.
In this case, clients desirous of services apply to assessee who in turn enquires from ICANN availability of domain name. On confirmation, assessee registers the clients for fees and for conditions as imposed by ICANN.
As already mentioned, Godaddy US is a registrar of the customers who need these services and provide the services to its customers. And ICANN is the central organization who appoints such registrar like Godaddy US and charge fee from Godaddy under a fixed predetermined formula.
The clients all over the worlds apply for services as per Proforma given by the assessee and pay fees for the same. One part of the fees is allegedly received by the Godaddy for web-hosting which is being offered for tax under royalty by the assessee and the other part is taken for domain name registration. A fixed percentage of the latter is given by the assessee to the ICANN.
6.4 Tax ability as Royalty
As per the section 9(1)(vi) of the act :
Explanation 2. – For the purposes of this clause, “royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for –
(i) the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;
(ii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;
(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).
As per article 12 of India US Double Taxation Avoidance Agreement.
3. The term royalties as used in this Article means :
(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright or a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and
(b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8.
The definition of royalty under the act is similar to tax treaty wherein the use of or right to use of any industrial, commercial, or scientific equipment or similar property should be treated as royalty. Here, certain terms need to be clarified in today’s information technology atmosphere:
Equipment : supplies or tools needed for a special purpose or the act of equipping someone or something
Scientific : of or relating to science or done in an organized way that agrees with the methods and principles of science.
In the instant case, the customers of Godaddy are using the server of the assessee and paying the fees for the same, as domain name registration is a tool which equips the customer with the right to use the server of Godaddy and web hosting charges are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment of domain registration fee is received.
Accordingly, the domain registration charges are royalty as per Section 9(1)(vi) the act as well as Article 12(3)(a) of the tax treaty.
It can be seen that domain registration is an integral part of the services which are offered by the assessee. The assessee in its submissions has not distinguished how domain registration charges are different from web hosting charges, the latter being duly admitted by the assessee itself as royalty which is duly reflected in its return o f income. Domain registration partakes the character of web hosting charges since without domain registration being in place, web hosting is not possible. As domain registration charges have been essentially charged for granting right to use the servers of the assessee, domain registration being the precondition to web hosting etc, and same being highly technical process and because of its inherent quality, the same squarely falls under the definition of royalty under the provisions of the Act and the Double Taxation Avoidance Agreement. Besides, both the services/facilities i.e. web hosting and domain name registration flow from the same server, it is only because of the peculiar nature of the two i.e. web hosting and domain name registration fall under different categories i.e. the first under FTS (because it involved high technique and make available condition is fulfilled as discussed earlier) and latter under royalty (because of the right it confers and the equipment it provides as discussed earlier). Here, it is likely that the assessee is not offering receipts from domain registration because it has to pay certain fixed percentage to ICANN which is not being paid by the US Government. However, it is the relationship of assessee and ICANN which should not affect the Indian Revenue in any way. In case, the assessee feels the burden o f taxation because of ICANN payments, the assessee should recover the same (tax) payable to India from ICANN.
The feasibility of section 201 of the Act, can also be seen in the hands of the assessee in view of non-deduction of TDS while making payment to ICANN.
6.5 In view of the above, it is concluded that the receipts from domain registration fee Rs. 17,41,54,636/- of is charged to tax as royalty as per the provisions of section 9(1)(vi) read with section 115A of the I.T.Act.”
5. On appeal, learned DRP upheld the finding of the Assessing Officer. Hence, this appeal by the assessee. At the time of hearing before us, learned counsel for the assessee, at the outset, stated that the appellant is not a tax resident of USA and, therefore, does not claim any benefit under the provisions of India-USA tax treaty. He stated that taxability of the receipt from domain registration fees needs to be examined under the provisions of the Income-tax Act,He stated that the learned Assessing Officer/DRP have incorrectly linked web hosting services with domain name registration services. He stated that these two services have independent existence. In support of his contention, he referred to a sample web hosting agreement between the assessee and the customer. He further submitted that domain name registration is the process of registering a domain name which identifies one or more IP address with a name that is easier to remember and use in URLs to identify particular web pages. The domain name allows others to access user’s website directly with an easy to memorize address instead of using a numeric IP address. Registering a domain name secures that specific internet address. In this regard, he referred to the sample domain name registration agreement. He further explained the process of registration of domain name which is as below :-
“a) A user makes a request to the appellant online through its website (www.godaddy.com).
b) When a user requests for a particular domain name registration, the appellant checks availability of the domain name with ICANN.
c) Subsequently, ICANN confirms the availability of the desired domain name and assigns a unique IP address to the domain name.
d) Based on the confirmation from ICANN, the appellant facilitates in registering the domain name for the user.
The appellant is not involved in actual purchase and sale of domain names (i.e., parking of domain names for subsequent sale to the users). It is important to note that above process is automated and no human intervention is involved for the purpose of domain name registration.
In short, following services are rendered by the appellant and ICANN under domain name registration :
