In case of Godaddy.Com LLC[1] (Taxpayer), the issue arose whether fees earned by the non-resident Taxpayer for providing domain name registration services can be characterized as royalty under provisions of Indian Tax Laws (ITL).
The Taxpayer, a US based company, is one of the several accredited registrars of domain for the Internet Corporation for Assigned Names and Numbers (ICANN). It provides various services like domain name registration, website design, and web hosting for a given fee. The customer is the owner of the domain name and the Taxpayer is a mere intermediary which facilitates registration services. The Taxpayer had not offered such fee to tax in India on the ground that it is in the nature of business income and in absence of permanent establishment, it was not taxable in India as per India-US tax treaty. The tax authority contended that the Taxpayer has granted right to use copyright to customers and sought to tax it as royalty income under provisions of the ITL as well as India-US DTAA. The Tribunal upheld the order of tax authority by stating that consideration received by the Taxpayer was in the nature of royalty since it involved the right to use or use of a trademark.
The Delhi HC noted that the Taxpayer facilitates registration of domain names for customers. The customer places request for domain name on website of the Taxpayer. The Taxpayer checks with the registry whether the domain name for which the request is lodged is available for registration. If the registry confirms that the requested domain name is available for registration, the Taxpayer enters into an agreement with its customers/registrant against payment of the prescribed fee.
Basis perusal of the agreement between the Taxpayer and its customers, the HC noted that mere registration of a domain name does not create any proprietory rights in the domain name. Thus, the Taxpayer is not owner of the domain name and it cannot confer the right to use or transfer the right to use the domain name to another person/entity. The HC also held that passing off and injunction actions are entertained by the courts where domain name registrations are brought about in bad faith or to perpetuate fraud. The courts tend to grant injunctive relief where the defendant, in such actions, is seen to be feeding off the plaintiff's goodwill and causing confusion amongst its customers regarding the origin of the subject goods and services. Such reliefs are granted on the basis that the definition of the expression “mark” includes a “name”, and in turn, the expression “trademark” so defined to include a mark, distinguishes the goods and services of one person from those of others. Therefore, it is possible in a given situation that a domain name may have the attributes of a trademark. The Supreme Court (SC) in case of Satyam Infoway v. Siffynet Solutions[2], held that it is the registrant (and not the registrar) who owns the domain name, and can protect its goodwill by initiating passing off action against a subsequent registrant of the same domain name/a deceptively similar domain name. Hence, the SC dealt with rights of domain name owner and not registrar like Taxpayer. The HC observed that if the Taxpayer had granted right to use its own domain name i.e., Godaddy.com, to a third person., it could be treated as royalty, but such is not the present case. The HC held that the fee received by Taxpayer for registration of domain names of its customers cannot be treated as royalty under provisions of the ITL and hence not taxable in India.
[1] ITA Nos. 891 of 2018, 261 of 2019 and 75 of 2023 dated 11 December 2023
[2] (2004) 6 SCC 145
