PDR Solutions FZC Vs DCIT (ITAT Mumbai)
ITAT Mumbai held that in absence of rights in the domain name, receipt from domain name registration doesn’t fall in the category of royalty as defined under Article 12(3) of India-UAE DTAA.
Facts- The assessee is incorporated in United Arab Emirates and is a tax resident of UAE. The assessee is engaged in the business of web presence and sale of domain name of global customers.
AO 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 well as the India UAE Double Taxation Avoidance Agreement (DTAA) and added the same to the total income of the assessee.
DRP passed the impugned final assessment assessing the income from domain name registration as royalty. Being aggrieved, the assessee has preferred the present appeal.
Conclusion- We are of the considered opinion that since the assessee had no right in the domain name, the income received by the assessee from domain name registration does not fall in the category of royalty as defined under Article 12(3) of the India UAE DTAA. Further, once the taxability fails in terms of the treaty provisions, there is no occasion to refer to the provisions of the Act, as in terms of section 90(2) the provisions of the Act or the DTAA, whichever is more beneficial to the assessee shall be applicable. We find that the decision of the coordinate bench of the Tribunal in com vs ACIT, (2018) 170 ITD 217 (Delhi-Trib.), relied upon by the AO, is factually distinguishable as in that case the taxpayer did not claim any benefit under the tax treaty. Hence, the AO is directed to delete the addition on account of income from domain registration services.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeals have been filed by the assessee against the separate impugned final assessment orders dated 31/05/2022 and 23/05/2022, passed under section 143(3) r/w section 144C(13) of the Income Tax Act, 1961 („the Act‘) by the Assessing Officer (‘AO‘), pursuant to the separate directions issued by the learned Dispute Resolution Panel–I, (‘learned DRP‟), under section 144C(5) of the Act for the assessment year 2017–18 and 2018–19, respectively.
2. Since both appeals pertain to the same assessee and the issues involved are also common, therefore, as a matter of convenience, these appeals were heard together and are being disposed off by way of this consolidated order. With the consent of the parties, the assessee’s appeal 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 considering it as a „Trademark‟.
The Assessing Officer (AO) erred in understanding the fact that the domain name does not lie with the appellant, and accordingly, there is no question of imparting rights 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(1Xvi) 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 income in computation and alleging that it is clearly evident that assessee is hiding the fact with respect to same and claimed that the same should be added to the income of the assessee.
The Assessing Officer (AO) erred in ignoring the fact that the assessee had made sufficient disclosures and submitted proper evidence in support of its contention that there shall not be any addition made on account of Sponsorship Income due to the absence of Permanent Establishment in India.
The assessing officer (AO) erred in law and in the fact that the income from Sponsorship is taxable as ‘Business income’ under the India-UAE tax treaty („tax treaty’) treating it as PE in India without giving adequate reasoning / explanation for treating it as PE in India.
The Appellant craves leave to add to, or alter, by deletion, substitution, modification, or otherwise, the above grounds of appeal, either before or during the hearing of the appeal.”
4. The brief facts of the case are: The assessee 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 year under consideration. During the year, the assessee received the following income from India:
