Fees Received for Domain Name Registration Cannot Be Treated as Royalty under Section 9(1)(vi) of the Income Tax Act: Delhi HC

Introduction: In a recent judgment dated 11.12.2023, the Delhi High Court in the case of ITA Nos.891/2018, 261/2019 & 75/2023, addressed the contentious issue of whether income received by GoDaddy.com LLC for providing domain name registration services amounted to ‘royalty’ under Section 9(1)(vi) of the Income Tax Act, 1961 (“the Act”). The Court’s decision provides clarity on the taxation of such services, considering the unique nature of domain names and the role of registrars like GoDaddy.com.

Background of the Case: The appeals pertained to the Assessment Years 2013-14, 2014-15, and 2015-16. The Assessing Officer treated the income earned by GoDaddy.com for domain name registration services as ‘royalty’ under Section 9(1)(vi) of the Act. The Dispute Resolution Panel and the Income Tax Appellate Tribunal (ITAT) upheld this characterization. GoDaddy.com contested this classification, arguing that it merely facilitated registration and did not transfer any ownership or right to use the domain names.

Contentions: The appellant contended that it acted as an intermediary and did not transfer any proprietary rights in the domain names. The appellant emphasized the distinction between domain names and trademarks, asserting that domain names were created through a registration process, unlike trademarks. The appellant also highlighted disclaimers in its agreements disavowing ownership rights in the registered domain names.

On the contrary, the Revenue argued that domain name registration was linked to web hosting services. It claimed that the domain names were similar to trademarks, and their use constituted ‘royalty’ under Section 9(1)(vi) of the Act.

Court’s Analysis and Decision: The Court carefully examined the nature of domain name registration services provided by GoDaddy.com. It noted that GoDaddy.com acted as a registrar, facilitating the registration of domain names on behalf of its customers. The Court emphasized that GoDaddy.com did not claim ownership rights in the registered domain names and cited contractual clauses disclaiming such rights.

Crucially, the Court distinguished between the role of GoDaddy.com as a registrar and the domain name registrant. It highlighted that GoDaddy.com’s customers owned the domain names, and the appellant did not transfer any proprietary rights in the names. The Court also noted the absence of any provision for exclusive ownership in the domain name registration process.

The Court concurred with GoDaddy.com’s position that the fee received for registration services could not be treated as ‘royalty’ under Section 9(1)(vi) of the Act. It held that the nature of services provided by GoDaddy.com did not satisfy the attributes required for income to be characterized as ‘royalty.’ The Court, therefore, ruled in favor of GoDaddy.com, allowing the appeals.

Author’s Note: The Delhi High Court’s judgment provides a significant clarification on the tax treatment of income derived from domain name registration services. By recognizing the role of registrars as intermediaries and acknowledging the absence of proprietary rights transfer, the Court has set a precedent that considers the unique nature of domain names in the context of taxation. This decision is likely to have implications for similar cases and offers guidance on the distinction between domain names and trademarks concerning income tax liability.

Author can be reached at cavivekkumar95@gmail.com

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February 2024