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Delhi HC relief for Godaddy in royalty case

In a major relief to Godaddy.com, the Delhi High Court has held that the fee received by the US firm for registration of domain names of third parties, which included its customers, cannot be treated as royalty under Income Tax Act, 1961.

The case emanates from a 2016 assessment order by which assessing officer (AO) had made an addition in the income received by Godaddy.com from domain name registration services by construing the same as royalty under Section 9(1)(vi) of the 1961 Act.

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The Income Tax Appellate Tribunal in 2018 dismissed the assessee’s plea against the AO’s order and upheld the additions made.

US-based Godaddy.com, which is an accredited registrar for the Internet Corporation for Assigned Names and Numbers, challenged the tribunal’s order in the HC, saying it charged fee from its customers for facilitating domain name registration, which was shared in three ways.

While a part of the fee received from its customers was retained by Godaddy.com, a portion of the fee was shared with Internet Corporation and the registry, its senior counsel Porus Kaka argued.

Godaddy.com contended that it was not engaged in licensing domain names and simply assisted customers and registrants in obtaining registration of domain names, thus the consideration received for such service could not possibly be characterised as royalty.

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For its fees to be considered royalty, a domain name ownership must exist and it must transfer all or any rights, including the right to use such domain names to its customers, which is not true in its case, Godaddy.com said.However, the revenue authorities contended that the domain name registration was inextricably linked to the web hosting services the assessee offered. Concededly, the assessee had offered the consideration received against web-hosting and web design services for the imposition of tax in India, the department said.

“The AO characterised the web-hosting services as a fee for technical services (FTS), although the consideration received was declared as royalty by the assessee. The respondent/revenue has thus recovered tax on FTS at 10%.” it stated.

According to the department, the tribunal was right in holding that the domain name was like a trademark, and hence, the consideration received by Godaddy could not have been treated as anything but royalty.

Accepting the stand of Godaddy.com, a Division Bench comprising Justices Rajiv Shakdher and Girish Kathpalia said that the assessee was only “acting as a registrar and thus offering its services to its customers for having their domain names registered.

The HC while quashing the tribunal’s order, said that “the aforementioned principle (royalty) may have been attracted if the appellant/assessee had granted rights in or transferred the right to use its domain name, i.e., Godaddy.com, to a third person. Therefore, the fee received by the appellant/assessee for registration of domain names of third parties, i.e., its customers, cannot be treated as royalty,” the HC held.

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