Income From Domain Name Registration Not Taxable As “Royalty”; Registrar Merely An Intermediary: Mumbai ITAT

The bench of G.S. Pannu (President) and Sandeep Singh Karhail (Judicial Member) held that the assessee, who offered domain name registration services to customers, merely acted as an intermediary in the entire process, and that it had no intellectual property right in the domain name. Thus, it concluded that the services provided by the assessee/registrar did not result in transferring any right in the domain name to the customers.

The assessee - PDR Solutions FZC, a tax resident of UAE, is engaged in the business of web presence and sale of domain name.

The Assessing Officer (AO) opined that the assessee is a domain name service provider, who is the owner of domain names, and is only providing the right to use the domain name to its clients. It ruled that domain name registration is taxable in India as royalty under the Income Tax Act and the India-UAE Double Taxation Avoidance Agreement (DTAA), since domain name is an ‘intangible asset’ in the nature of ‘trademark’. Thus, the AO passed an order making additions to the assessee’s income.

Against this, the assessee filed an appeal before the ITAT.

The assessee- PDR Solutions submitted before the ITAT that it is a Registrar, who is authorised by ICANN, an organisation charged with overseeing the name and number systems of the Internet, and that it acts as an intermediary in the entire process of domain name registration.

It added that its role is merely to check the domain name sought to be registered by the customer in the database maintained by the Registry. The assessee argued that it does not grant domain names and that the domain name is not an intellectual property right of the assessee. The right over the domain name is only with the customer/registrant, the assessee contended.

The Tribunal noted that the domain name registration process involves the ICANN, the Registry, Registrar, and Reseller. The Registrar is an entity that offers domain name registration services to Registrants, while the Reseller is a third-party company that offers domain name registration services through a Registrar. It observed that the assessee functions as the Registrar who provides domain name registration to various customers and resellers.

The ITAT took into account that prior to registration by the customer, the domain name does not exist in the database. Also, the right in the domain name comes into existence in favour of the customer only upon registration and that the same belongs to the customer only during the period of registration. Further, if after the expiry of the registration period, the customer does not renew the registration, the same domain name would be available to another customer for registration, which can also be done through a different Registrar.

While reckoning that the only person who can claim the right over the domain name is the customer, the ITAT held that the activity of the assessee/Registrar does not result in transferring any right in the domain name, since the Registrar only facilitates the registration of the domain name after checking its availability in the database maintained by the Registry.

The Tribunal reiterated that the assessee/ Registrar does not have any right in the domain name, which was registered by it merely as a facilitator. Further, the Registrar does not have any right in the data submitted by the customer for registration of the domain name, it held.

Thus, the ITAT concluded 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’”, the Tribunal added.

Thus, the Tribunal held that the income received by the assessee from domain name registration did not fall in the category of “Royalty”, as defined under Article 12(3) of the India-UAE DTAA.

Observing that the assessee is a resident of UAE, the ITAT held that in view of Section 90(2) of the Income Tax Act, if the provisions of the DTAA are more beneficial to the assessee than the Income Tax Act, the assessee shall be governed by the DTAA.

The ITAT thus allowed the appeal, directing the AO to delete the additions made on account of income from domain registration services.

Case Title: PDR Solutions FZC versus DCIT

Dated: 30.12.2022 (ITAT Mumbai)

Representative for the Appellant: Mr. Porus Kaka a/w Mr. Divesh Chawla

Representative for the Respondent: Mr. Amit Kumar Soni

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