Fee received by GoDaddy for Registration of Domain Names cannot be treated as Royalty: HC [Read Order]

The Delhi High Court in the matter of GODADDY.COM LLC Vs. ASSISTANT COMMISSIONER OF INCOME TAX has held that Fee received by GoDaddy for the Registration of Domain Names cannot be treated as Royalty.

These appeals were admitted on different dates, an identical substantial question of law has been framed in all three appeals. Insofar as ITA No.891/2018 is concerned, the question of law was framed on 25.02.2019. Likewise, concerning ITA No.261/2019, the question of law was framed on 29.07.2019. Similarly, the question of law in ITA No.75/2023 was framed on 10.02.2023.

The common question of law which arises for consideration, thus, reads as follows: “Whether on the facts of the case and in law, the Income Tax Appellate Tribunal [in short, “Tribunal”] erred in holding that the income received by the appellant as a consideration for providing domain name registration services amounted to „royalty‟ under Section 9(1)(vi) of the Income Tax Act, 1961 [in short, “Act”]?

On behalf of the appellant/assessee, arguments were advanced by Mr Porus Kaka, senior advocate. Submissions were made on behalf of the respondent/revenue by Mr Sunil Agarwal and Mr Aseem Chawla.

Mr Kaka’s submissions can be broadly paraphrased as follows:

(i) The appellant/assessee is a US-based company and is an accredited registrar for the Internet Corporation for Assigned Names and Numbers (ICANN).

(ii) The appellant/assessee provides services such as domain name registration, website design, and web hosting.

(iii) The appellant/assessee is one of several ICANN registrars. The appellant/assessee charges a fee from its customers for facilitating domain name registration, which is shared, three ways. While a part of the fee received from the customers is kept by the appellant/assessee, a portion of the fee is shared with ICANN and the registry. The domain name’s owner is the customer who seeks domain name registration. The customer can, at his option, dissolve his engagement with the appellant/assessee and move to another registrar, having a back-to-back arrangement with ICANN and the registry appointed by it. The customer would not have been able to engage with another Registrar had the appellant/assessee been the domain name’s owner.

(iv) The Tribunal has erred in concluding that a domain name is like a trademark. This view is based on a misappreciation of the ratio of the judgment rendered by the Supreme Court in Satyam Infoway Ltd. and the judgment of this court in Tata Sons.

(v) The appellant/assessee does not transfer any right to use the domain name to the customer, i.e., the registrant. It is the registrant who owns the domain name, and hence, if at all, the customer/the registrant can transfer the domain name.

(vi) The appellant/assessee is only an intermediary, as submitted above, and in this context renders registration services. The appellant/assessee thus does not have any right in the property or trademark in the domain name. The consideration received by the appellant/assessee as a fee is not received for use or right to use the domain name or even for transfer of all or any right of such domain name. [See Satyam Infoway Ltd., People Interactive (India) Pvt. Ltd vs Vivek Pahwa 2016 SCC Online Bom 7351 and PDR Solutions FZC v DCIT (2023) 145 taxmann.com 84 (MumbaiTrib.)]

A close perusal of the Clause mentioned would show that what is agreed between the appellant/assessee and its customers is that mere registration of a domain name does not create any proprietorship rights in the name used as the domain name or in the domain name registration either in the appellant/assessee or the customers or even any other third party. 15.3 Therefore, the submission advanced on behalf of the appellant/assessee, i.e., that since it is not the domain name’s owner, it cannot confer the right to use or transfer the right to use the domain name to another person/entity, deserves acceptance.

We are also of the view 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. [See Section 2m read with Section 2zb of Trademarks Act, 1999].

The Supreme Court, in Satyam Infoway, 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. The observations made in the following paragraphs of Satyam Infoway, being apposite, are extracted hereafter:

“What is important for the purposes of the present appeal is the protection given to intellectual property in domain names. A prior registrant can protect its domain name against subsequent registrants. Confusing similarity in domain names may be a ground for complaint and similarity is to be decided on the possibility of deception amongst potential customers. The defences available to a compliant are also substantially similar to those available to an action for passing off under trademark law… What is also important is that the respondent admittedly adopted the mark after the appellant. The appellant is the prior user and has the right to debar the respondent from eating into the goodwill it may have built up in connection with the name…”

From a perusal of the above, it is clear that the Court in Satyam Infotech was concerned only with the rights of the domain name owner and not the Registrar, while determining whether passing off action can be initiated in relation to domain names. Given this position, the Tribunal’s reliance on this judgment is misconceived.

In this case, however, we need not travel down this path, as the appellant/assessee is only acting as a Registrar and thus offering its services to its customers for having their domain names registered.

The aforementioned principle 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.

Thus, for the foregoing reasons, we are of the view that the question of law has to be answered in favour of the appellant/assessee and against the respondent/revenue.

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