WILD WEST DOMAINS, LLC,GURGAON vs. ACIT, CIRCLE-3(1)(1), INT. TAX. , NEW DELHI

I.T.A.No.1774/Del/2022

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “D” NEW DELHI BEFORE SHRI G.S. PANNU, HON’BLE VICE PRESIDENT AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER आ.अ.सं/.I.T.A No.1774/Del/2022 िनधा�रणवष�/Assessment Year: 2019-20 बनाम Wild West Domains, LLC ACIT, Go Daddy India Domains and Hosting Vs. Circle-3(1)(1), Int. Services Private Limited, First Floor, Taxation, 01A167, WeWork Bristol Chowk, Civic Centre, Platina Tower, MG Road, Sector-28, Minto Road, Gurgaon, Haryana. NewDelhi. PAN No.AABCW2372H अपीलाथ� Appellant ��यथ�/Respondent

Assessee by Shri Kanchun Kaushal, FCA, Shri Rishabh Malhotra, AR & Ms. Saloni Shital, AR Revenue by Shri Vizay B. Vasanta, CIT-DR & Shri Vivek Kumar Upadhyay, Sr. DR सुनवाईक�तारीख/ Date of hearing: 26.07.2024 29.07.2024 उ�ोषणाक�तारीख/Pronouncement on आदेश /O R D E R PER C.N. PRASAD, J.M.

This appeal is filed by the assessee against the assessment order dated 23.06.2022 passed u/s 143(3) r.w.s. 144C(13) of the Act pursuant to the directions of the DRP dated 18.05.2022 u/s 144C(5) of the Act for the AY 2019-20. Assessee raised the following grounds:

I.T.A.No.1774/Del/2022

“GENERAL 1. On the facts and circumstances of the case and in law, the final assessment order passed by the Ld. Assessing Officer (“Ld. AO”) for making an addition of INR 7,49,03,090/- to the returned income of the Appellant is contrary to provisions of the Income- tax Act, 1961 (“the Act”) and therefore, void-ab- initio. ELIGIBILITY TO AVAIL BENEFIT UNDER INDIA-USA TAX TREATY 2. On the facts and circumstances of the case and in law, the Ld. AO as well as Ld. Dispute Resolution Panel (“DRP”) have erred in not allowing to the Appellant, the benefit of India-USA Double Taxation Avoidance Agreement (“DTAA”) by holding that the Appellant does not qualify as a tax resident thereof under Article 4 of the India-USA DTAA. TAXABILITY OF INCOME FROM DOMAIN NAME REGISTRATION. WEB HOSTING. WEB DESIGNING. SSL CERTIFICATION SERVICES ETC. 3. On the facts and circumstances of the case and in law, the Ld. AO as well as the Ld. DRP have erred in holding that the Appellant's receipts from domain name registration, web hosting, web designing, SSL certification services etc. amounting to INR 7,49,03,087/- should be brought to tax as fee for technical services/ fees for included services and in doing so, failed to appreciate: (i) that the receipts are not taxable under section 9(i)(vii) read with section 115A of the Act. (ii) that the receipts are not taxable under Article 12(4) of the India-USA DTAA (iii) that the services provided by the Appellant are standard services that are provided without involving any human intervention and which do not ‘make available’ any 2

I.T.A.No.1774/Del/2022

technology to the users which can utilize or deploy in the future on their own without recourse to the Appellant. LEVY OF INTEREST UNDER THE PROVISIONS OF THE ACT 4. On the facts and circumstances of the case and in law, the Ld. AO erred in levying interest under section 234A, 234B and 234D of the Act. 5. On the facts and circumstances of the case and in law, the Ld. AO has grossly erred in including the interest granted under section 244A of the Act whilst computing the interest under section 234D of the Act on the amount of excess refund. INITIATION OF PENALTY UNDER SECTION 274 READ WITH 270A OF THE ACT 6. On the facts and circumstances of the case and in law, the Ld. AO erred in mechanically initiating proceedings under section 274 read with 270A of the Act. The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to add, alter, amend and / or modify any of the grounds of appeal at or before the hearing of the appeal.”

adjudication is required. In ground no.2 the assessee is challenging

the order of the AO as well as the DRP in not allowing the assessee

the benefit of India USA Double Taxation Avoidance Agreement

(DTAA) holding that the assessee does not qualify as a tax resident

under Article 4 of India USA DTAA.

I.T.A.No.1774/Del/2022

incorporated in USA. Assessee is engaged in the business of providing

facilitation of domain name registration, web hosting, web designing,

SSL certification services and other services to resellers across the

world. These services have been rendered to Indian resellers from

outside India.

benefits under the DTAA of US Treaty observing as under:

“4. Is the Assessee Really Eligible for the Benefits under the DTAA? The assessee has stated that it was converted to a Limited Liability Company during the year under consideration. Vide various notices, the assessee was asked to provide the income tax returns filed by it in USA as also its TRC for the entire period under consideration. The assessee has furnished a TRC for only that part of the year: for which it was not an LLC. Moreover, the assessee has not provided copies of any returns filed by it in USA. It may be pertinent to mention here that only if an otherwise disregarded entity chooses to get taxed in USA will it file its tax returns there. In order to understand the material relevance.of this fact, it is critical to gain a perspective of the prevailing laws in force in USA. The assessee is a limited liability company or an LLC as per the laws of USA. What this means is that income is not liable to be taxed in its hands in USA. Instead, it is taxed in the hands of the shareholders. Therefore, the assessee is a fiscally transparent entity in its country of resident as it allows all income to pass through it. In other

I.T.A.No.1774/Del/2022

words, it does not enjoy the benefits of the income it earns but passes it on for the enjoyment of its partners. Accordingly, the assessee lacks beneficial ownership of income earned by it from India and in turn is not eligible to be considered as a “resident” for the purposes of the India-USA DTAA. This issue was dealt with extensively in the “The Application of the OECD Model Tax Convention to Partnerships” Report of the OECD’s Committee on Fiscal Affairs. According to the committee, the clear rule of Article 1 of any DTAA is that only persons who are residents of the Contracting States are entitled to the benefits of the tax convention entered into by these States. Where income is earned by a partnership, the issue of whether the partnership itself is entitled to the benefits of the convention will depend on whether the partnership qualifies as a person who is a resident of a Contracting State under the relevant DTAA. Various issues of taxation arise in cross-border transactions that are compounded by the fact that these transactions take place between entities of varying characteristics organised under respective domestic laws of the nations involved. How a particular entity is organised under a country’s domestic law certainly has a bearing on its domestic taxation. Broadly, legal entities (regardless of nomenclature) can be treated -. in two different ways for taxation: 1. Opaque entities: These include companies/body corporates such as PIc/Ltd (UK), Inc (USA), Pvt. Ltd. (India), Pte Ltd (Singapore), Corporation (Japan), GmBH (Germany), AB (Sweden). They are referred to as opaque owing to the fact that income is taxed at their level. 2. Transparent entities: These normally include partnerships, business trusts, and

I.T.A.No.1774/Del/2022

limited liability companies. They are called transparent in certain jurisdictions owing to the fact that as per their domestic tax law income flows through such entities to the respective shareholders/partners and no taxation occurs at the level of the transparent entity. Common examples include LP (USA), LLC (USA), and KG (Germany). Complexities in taxation occur due to the fact that while some countries treat certain entities such as partnerships arid LLCs as transparent entities, imposing no tax on the entity itself but taxing each partner/shareholder on its share of the entity's income, others treat the partnership as a taxable entity, usually taxing the partnership on its income as if it were a company. The Committee termed these situations as Conflicts of Allocation and provided for a resolution to the same. The following observations have been made by the Committee and the same are material in the instant case: For a transparent entity, entitlement to treaty benefits will therefore first depend on whether it qualifies as a “resident”. If the State in which a partnership has been organised treats that partnership as fiscally transparent, then the partnership is not “liable to tax” in that State within the meaning of Article 4, and so cannot be resident for purposes of the Convention. The Committee agreed that for the purposes of determining whether a partnership liable to tax, the real question is whether the amount of tax payable on the partnership income is determined in relation to the personal characteristics of tt partners (whether the partners are taxable or not, what other income they have, what are the personal allowances to which they are entitled and what is the tax rate applicable to them). If the

I.T.A.No.1774/Del/2022

answer to that question is yes, then the partnership should not itself be considered to be liable to tax. The fact that the income is computed the level of the partnership before being allocated to the partners, that the tax is technically paid by the partnership or that it is assessed on the partnership as described in the preceding paragraph will not change that result. Here, the main principle to be borne in mind is that if the income, though allocated to the taxpayer under the laws of the source State, is not similarly allocated for purposes of determining the liability to tax on that item of income in the State of residence of the taxpayer claiming the benefits of the Convention, then the source State should not grant benefits under the Convention. In these latter circumstances, the underlying factual premise on which the allocation of taxing rights is based, that is, that the source State is only obliged to reduce its domestic law tax claim where the income in question is potentially liable to tax in the hands of a resident of the treaty partner, is simply not present. Analogy can also be drawn from the distributive rules set out in case of dividends, interest, royalties and FTS wherein the benefits of the treaty are contingent on the claimant passing the beneficial ownership test. As can be reasonably ascertained, a transparent entity inherently lacks beneficial ownership of any type of income. Accordingly, such an entity cannot be considered eligible for the benefits under a treaty. Where a State disregards a partnership for tax purposes and treats it as fiscally transparent, taxing the partners on their share of the partnership income, the partnership itself is not liable to tax and may not, therefore, be considered to be a resident of that State. In such a case, since the income of the partnership ‘flows through’ to the partners under the domestic law of that State,

I.T.A.No.1774/Del/2022

the partners are the persons who are liable to tax on that income and are thus the appropriate persons to claim the benefits of the Conventions concluded by the States of which they are residents. It may not be out of place to mention, then, that the scheme of taxation formulated under a tax convention is to ensure that the benefits of the Convention accrue to the persons who are liable to tax on the income. What is even more pertinent to note is the Committee’s assertion that States should not be expected to grant the benefits of a tax convention in cases where they cannot verify whether a person is truly entitled to these benefits. Therefore, the assessee, being a Limited Liability Company in USA, is not entitled to the benefits under the India-USA DTAA. Accordingly, the receipts of the assessee are to be taxed only in accordance with the Indian Income-tax Act.”

the AO is grossly erred in not allowing the benefit of India USA DTAA

alleging that the assessee is a fiscally transparent entity in USA and

lacks beneficial partnership of income. Thus, it is not liable to tax

and, therefore, cannot be considered as a resident for the purposes

of India USA Tax Treaty disregarding the Tax Residency Certificate

(TRC) filed by the assessee and also ignoring the decision of the

Hon’ble Supreme Court in the case of Azadi Bachao Andolan (263 ITR

706), wherein it has been held that liable to tax does not equate to

I.T.A.No.1774/Del/2022

actual payment of tax. However, the DRP rejected the contentions

of the assessee observing as under:

“DRP Directions: 3.1 The assessee is a non-resident incorporated in the USA. It has provided online database access pertaining to health to customers based in India. The assessee has stated that it has provided access to database which is in the nature of subscription made to a journal / magazine and that not part of the copyright was transferred. 3.2 The assessee has stated that it was converted into a Limited Liability Company during the year under consideration. Earlier it was a Limited Liability Partnership (LLP). The assessee has provided Tax Residency Certificate (TRC) only for the period that it was LLP. No tax reference tax return have been filed by the assessee. The AO has pointed out that the LLP is a fiscally transparent entity as it is the partners who are taxed and not the entity. Hence it lacks beneficial ownership of income earned by it from India and the AO has stated in view of the same, it is not considered eligible to be considered as "resident" for the purpose of India-USA DTAA. 3.3 The AO has relied upon the report titled "The Application of OECD Model Tax Convention to Partnerships" issued by Committee on Fiscal Affairs OECD to state that when a state disregards a partnership for tax purpose and treats it as fiscally transparent taxing the partners on their shares of partnership income, the partnership is not liable to tax and should therefore not considered to be resident of state. The scheme of tax convention is that the benefits should accrue only to those entities who are liable to tax on income.”

I.T.A.No.1774/Del/2022

upholding his findings in the draft assessment order on the directions

of the DRP.

under:

“APPELLANT’S CLAIM OF BENEFIT OF THE INDIA-USA DTAA

I.T.A.No.1774/Del/2022

I.T.A.No.1774/Del/2022

it earns but passes it on for the enjoyment of its partners. Accordingly, the assessee lacks beneficial ownership of income earned by itfrom India and in turn is not eligible to be considered as a “resident” for the purposes of the India-USA DTAA………. ………..Therefore, the assessee, being a Limited Liability Company in USA, is not entitled to the benefits under the India-USA DTAA. Accordingly, the receipts of the assessee are to be taxed only in accordance with the Indian Income-tax Act. ” 6. It is respectfully submitted that the interpretation proposed by the Ld. AO is erroneous as the same will render a tax treaty otiose in case of economic double taxation i.e., taxability of the cross-border income in the hands of different taxpayers. 7. With respect to the claim regarding as to why the Appellant should be allowed the benefit of India-USA tax treaty, it is submitted as under:- TRC IS A CONCLUSIVE AND SUFFICIENT PROOF TO ESTABLISH RESIDENCY 8. It is most humbly submitted that the Appellant had filed the Tax Residency Certificates before the Assessing Officer during the assessment proceedings. Kind reference of the Hon’ble Tribunal is drawn to Page 34 and Page 38 of the Paper book. As the current case, the financial year was from April 1, 2018 to March 31, 2019, the Appellant to cover the entire period had filed two TRCs, one for calendar year 2018 (at Page 38 of the Paper book) and the other for calendar year 2019 (at page 34 of the Paper book). For ready reference, the relevant extract of the TRCs has been reproduced hereunder:- “Taxpayer: WILD WEST DOMAINS LLC TIN: 86-1047154 Tax Year: 2019 I certify that the above-named Limited Liability Company is a branch, division or business unit of a

I.T.A.No.1774/Del/2022

partnership that files Form 1065, U.S. Return of Partnership Income and to the best of our knowledge, each partner listed below is a resident of the United States of America for purposes of U.S. taxation and will remain so throughout the current taxable year. Names : GoDaddy Inc GD Subsidiary Inc” 9. A perusal of the above TRC highlights the following: • That the appellant assessee through a fiscally transparent entity is referred to as the taxpayer. • That it has been allotted a Tax Identification Number 10. It is thus submitted that the Ld. AO was not correct in observing that the Appellant has furnished TRC for only part of the year for which it was not an LLC. 11. Your Honors will appreciate that the TRC per se constitutes a conclusive and sufficient evidence for tax residency and beneficial ownership of an income and is eligible to avail the benefit of the DTAA. In this regard, reference may be drawn from the decision of Hon’ble Supreme Court in the case of UOI vs. Azadi Bachao Andolan [2003] 263 ITR 706 (refer Page 61 to 96 of the case law paper book) wherein the Court upheld that validity of Circular 789 dated April 13, 2000, issued by Central Board of Direct Taxes (“CBDT”), thereby ensuring the applicability of India-Mauritius tax treaties having a valid TRC issued in Mauritius. 12. Furthermore, it is respectfully submitted that the Government of India issued a Press release dated March 1, 2013, re-iterating that Circular 789 (supra) continues to be in force and it has clarified that a 13

I.T.A.No.1774/Del/2022

Certificate of Residence issued by Tax Authorities of the other country will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAA. 13. In addition to the above, reliance is also placed on the recent decision of Sarva Capital LLC vs. ACIT [2023] 153 taxmann.eom 618 (Delhi - Trib.) (refer Page 97 to 115 of the case law paper book) wherein, following the decision of the Apex Court in Azadi Bachao (supra) and the decision of the Hon’ble jurisdictional high court in the case of Blackstone Capital Partners (Singapore) VI FDI Three Pte Ltd. [2023] 452 ITR 111, the coordinate bench of this Hon’ble Tribunal held that held that the tax authorities cannot go behind TRC as the TRC issued by the competent authority of another country is sufficient evidence to claim treaty eligibility, residential status and legal ownership. Thus, it was held that the departmental authorities could not have denied the tax treaty benefits to the assessee by holding that the assessee cannot be treated as tax resident of Mauritius. The relevant extract of the decision is reproduced hereunder:- “16. First and foremost, the residential status of the assessee needs to be decided. As discussed earlier, from its very inception, the assessee has been granted TRC by Mauritius tax authorities. Though, the Assessing Officer is conscious of this fact, however, he has brought the theory of substance over form to deny Treaty benefits to the assessee despite valid TRC. In our view, the aforesaid decision of the Assessing Officer cannot be accepted under any circumstance. Now, it is well settled that once the tax resident of Mauritius is holding a valid TRC, the Assessing Officer in India cannot go behind the TRC to question the residency of the entity. In fact, since, there were considerable number of disputes due to non acceptance of TRC as a valid piece of evidence for tax residency by the departmental authorities, the CBDT issued circular No. 789 14

I.T.A.No.1774/Del/2022

dated 13.04.2000, specifically, with reference to India-Mauritius DTAA clearly stating that once, the TRC has been issued by the competent authority of the other tax jurisdiction, it will be treated as a valid piece of evidence in so far as tax residency status is concerned. The sanctity of the aforesaid circular issued by the CBDT was challenged before the Hon’ble High Court and while, ultimately, deciding the issue, Hon’ble Supreme Court in case of Union of India vs. Azadi Bachao Andolan (supra), not only upheld the validity of Circular No. 789 dated 13.04.2000, but held that once, the TRC has been issued by the competent authority of the other country, it will demonstrate the tax residency of the entity and the concerned entity would be eligible to avail the benefits under India-Mauritius DTAA. The ratio laid down by the Hon’ble Supreme Court as aforesaid, was followed subsequently in a number of decisions and in a recent decision of Hon ’ble jurisdictional High Court in case of Blackstone Capital Partners (Singapore) VIFDI Three Pte Ltd. vs. ACIT (supra), has reiterated that the tax authorities in India cannot go behind the TRC issued by the competent authority in other tax jurisdiction, as the TRC is sufficient evidence to claim not only the residency and legal ownership but also Treaty eligibility. In case of MIH India (Mauritius) Ltd. vs. ACIT (supra), identical view has been expressed by the coordinate Bench. Thus, in our view, the Assessing Officer has committed a fundamental error in denying Treaty benefits to the assessee in spite of the fact that the assessee is having a valid TRC. ” (Emphasis supplied by us) 14. Thus, it is most humbly submitted that the TRC filed by the Appellant will serves as a valid proof of tax residency and eligibility of the Appellant to claim DTAA benefit and therefore, the findings of the Ld. AO and Ld. DRP in denying the benefit under India- USA tax treaty are invalid and against the settled jurisprudence. 15

I.T.A.No.1774/Del/2022

decision of the Mumbai Bench of the Tribunal in the case of

Linklaters LLP Vs. ITO (Int. Taxation) 40 SOT 51 submits that in the

context of eligibility of LLP to avail the benefit of India UK Tax

Treaty the Hon’ble Tribunal has held that the India UK Tax Treaty

would apply to a UK Limited Liability Partnership (LLP) even though it

was a pass through entity for UK tax purposes. The Ld. Counsel for

the assessee further submits that the Tribunal had observed that the

mode of taxation of income of a partnership firm (whether the

income is taxable in the hands of the partnership firm or the

partners) would not matter as long as the entire income of the

partnership firm was taxed in the country of residence i.e. (UK),

treaty benefits could not be denied.

Tribunal in the case of Herbert Smith Freehills LLP Vs. ACIT (TS 822-

ITAT-202 (Del) Trib.) submits that the coordinate bench following the

decision of Mumbai Bench of the Tribunal in the case of Linklaters

LLP (supra) it has been held that the benefit of India UK DTAA should

I.T.A.No.1774/Del/2022

be extended to a UK based Limited Liability Partnership (LLP), with

majority of its partners being tax resident of UK, on the portion of its

income from Indian engagements which has been taxed in the UK in

the hands of its UK Tax Resident Partners. Therefore, the Ld.

Counsel submits that this principle shall mutatis mutandis apply in

the context of India UK Tax Treaty.

the Assessing Officer. Further the Ld. DR placing reliance on the

decision of the coordinate bench in the case of GoDaddy.com LLC Vs.

DCIT in ITA No.8085/Del/2018 dated 29.03.2022 for the AY 2015-16

had considered an identical issue and held that the income received

from the assessee from registration of domain name and other

services would fall under fees for technical services u/s 9(1)(vii) as

well as Article 12(iv)(a) of the India USA Tax Treaty.

below. Perusal of the final assessment order, we observed that the

AO had stated that assessee had furnished TRC for only that part of

the year for which it was not an LLC. However, the Ld. Counsel for

the assessee invited our attention towards the paper book at pages

34 and 38, wherein copy of TRC issued by Department of the Treasury

Internal Revenue Service, Philadelphia, USA and submitted that 17

I.T.A.No.1774/Del/2022

assessee was recognized as tax payer for the year 2019 and 2018. We

observed from the TRCs issued by the Department of Treasury

Internal Revenue Service, Philadelphia it was certified that the

assessee Limited Liability Company (LLC) is a branch, division or

business unit of US partnership. It was also certified that the

partnership has filed an information return in Form 1065, US

partnership return of income and each of the partners listed in the

TRC i.e. GD Subsidiary Inc. and GoDaddy Inc. are residents of the

United States of America for purposes of US taxation. Therefore, in

our view these TRCs issued by Department of Treasury Internal

Revenue Service, Philadelphia USA clearly recognizes the assessee

Limited Liability Company having two partners are residents of

United States of America filing US partnership return of income.

Therefore, the observation of the AO that the assessee has furnished

a copy of TRC for only part of the year for which it was not an LLC

appears to be not correct.

assessee is not liable to be taxed in the hands of the USA instead of it

is taxed in the hands of the shareholders, therefore, the assessee is a

fiscally transparent entity in its country of resident as it allows all

income to pass through it. In other words it is the observation of the

I.T.A.No.1774/Del/2022

AO that assessee do not enjoy the benefits of income it earns to

passes it for the enjoyment of its partners. Therefore, the AO is of

the view that the assessee lacks beneficial ownership for income

earned by it from India and in turn is not eligible to be considered as

a resident for the purposes of India US DTAA. In so far as the TRCs

are concerned as we have mentioned earlier, both the TRCs issued by

US Authorities clearly show that the assessee is a resident of US filing

returns and was treated as resident for the purpose of taxation.

the Hon’ble Supreme Court held as under:

“It is urged by the learned Attorney General and Shri Salve for the appellants that the phrase 'liable to taxation' is not the same as 'pays tax'. The test of liability for taxation is not to be determined on the basis of an exemption granted in respect of any particular source of income, but by taking into consideration the totality of the provisions of the income-tax law that prevails in either of the Contracting States. Merely because, at a given time, there may be an exemption from income-tax in respect of any particular head of income, it cannot be contended that the taxable entity is not liable to taxation. They urge that upon a proper construction of the provisions of Mauritian Income Tax Act it is clear that the FIIs incorporated under Mauritius laws are liable to taxation; therefore, they are 'residents' in Mauritius within the meaning of the DTAC……. ………We are inclined to agree with the submission of the appellants that, merely because exemption has been granted in respect of taxability of a particular source of income, it cannot be postulated that the entity is not 'liable to tax' as contended by the respondents…… 19

I.T.A.No.1774/Del/2022

There is substance in the contention of Mr. Salve learned counsel for one of the appellants, that the expression 'resident' is employed in the DTAC as a term of limitation, for otherwise a person who may not be 'liable to tax' in a Contracting State by reason of domicile, residence, place of management or any other criterion of a similar nature may also claim the benefit of the DTAC. Since the purpose of the DTAC is to eliminate double taxation, the treaty takes into account only persons who are 'liable to taxation' in the Contracting States. Consequently, the benefits thereunder are not available to persons who are not liable to taxation and the words 'liable to taxation' are intended to act as words of limitation ”………. …………."85. In our view, the contention of the respondents proceeds on the fallacious premise that liability to taxation is the same as payment of tax. Liability to taxation is a legal situation; payment of tax is a fiscal fact. For the purpose of application of article 4 of the DTAC, what is relevant is the legal situation, namely, liability to taxation, and not the fiscal fact of actual payment of tax. If this were not so, the DTAC would not have used the words, "liable to taxation ", but would have used some appropriate words like "pays tax"…………….. ……………..87. In a Manual on the OECD Model Tax Convention on Income and on Capital, at paragraph 4B. 05, while commenting on Article 4 of the OECD Double Tax Convention, Philip Baker points out that the phrase 'liable to tax' used in the first sentence of Article 4.1 of the Model Convention has raised a number of issues, and observes: ……………"It seems clear that a person does not have to be actually paying tax to be "liable to tax" - otherwise a person who had deductible losses or allowances, which reduced his tax bill to zero would find himself unable to enjoy the benefits of the convention. It also seems clear that a person who would otherwise be subject to comprehensive taxing but who enjoys a specific exemption from tax is nevertheless liable to tax, if the

I.T.A.No.1774/Del/2022

exemption were repealed, or the person no longer qualified for the exemption, the person would be liable to comprehensive taxation………..” (Emphasis Supplied by us)”

618) the coordinate bench of Delhi Tribunal following the decision of

the Apex Court in the case of Azadi Bachao Andalon (supra) held that

the tax exemption granted under the domestic tax laws does not lead

to the conclusion that the entities availing such exemption are not

liable to taxation. The term liable to taxation must be distinguished

actual payment of taxation and thus, the contention of the revenue

that the LLC in the present case is not liable to taxation was

rejected. While holding so the Tribunal observed as under:

“16. One more objection of the Assessing Officer is that the assessee, being a fiscally transparent entity having no liability to tax in Mauritius due to exemption in capital gain income under the domestic laws of Mauritius, cannot claim benefits of avoidance of double taxation. In our view, this issue has also been addressed by Hon ’ble Supreme Court in case of Azadi Bachao Andolan (supra). While dealing with this particular issue, the Hon’ble Supreme Court interpreted the expression “liable to taxation” as used in Article 4 of India-Mauritius DTAA as well as the domestic law of Mauritius and held that merely because tax exemption under certain specified head of income including capitaI gain from sale of shares has been granted under the domestic tax laws of Mauritius, it cannot lead to the conclusion that the entities availing such exemption are not liable to taxation. The Hon’ble Supreme Court categorically rejected Revenue’s contention that avoidance of double taxation can arise only when tax is actually paid in one of 21

I.T.A.No.1774/Del/2022

the contracting States. Hon’ble Court held that ‘liable to taxation’ and ‘actual payment of tax’ are two different aspects. Thus, keeping in view the ratio laid down by Hon ’ble Supreme Court, as aforesaid, the reasoning of the Assessing Officer that since, the assessee is not liable to tax under Article 4 of the India-Mauritius Treaty, it cannot claim benefit of Treaty provisions, is liable to be rejected. ” (Emphasis Supplied by us)”

transparent entities such as single member LLCs being eligible to

avail treaty benefits, the Mumbai Bench of the Tribunal in the case of

Linklaters LLP Vs. ITO (supra) in the context of eligibility of LLP to

avail the benefit of India UK Tax Treaty, the Tribunal has held that

the India UK Tax Treaty would apply to a UK Limited Liability

Partnership even though it was a pass through entity for UK tax

purposes. While holding so the Tribunal observed as under:

“56. Modalities or mechanism of taxation may vary from jurisdiction to jurisdiction, as domestic law is a sovereign function and a bilateral tax treaty, or even the need of uniformity in entity classification approach - no matter how desirable someone may consider it to be, does not dictate such modalities of taxation being legislated. The fact of taxation, however, can be decided in an objective and uniform manner. Take, for example, a situation, in which the residence country of partnership does not regard it as a taxable unit and the entire income from partnership is taxed in the hands of the persons constituting such partnership, and some of those partners are not even residents of the tax jurisdiction in which partnership firm is resident. In such a situation, in case partnership firm seeks treaty protection from the other Contracting State, it could

I.T.A.No.1774/Del/2022

possibly be argued that income of the partnership firm is not entirely taxable even in the Contracting State in which partnership firm has fiscal domicile, and, therefore, the income of the partnership was not taxed in the residence State. However, in a situation in which entire income of the partnership firm is taxed in the residence country - whether in its own hands or in the hands of the partners - this objection can hardly be taken. From a country perspective, what really matters is whether the income, in respect of which treaty protection is being sought, is taxed in the treaty partner country or not. That is clearly the underlying principle based on which residence definition is modeled…………. 71. Viewed in the light of the detailed analysis above, in our considered view, it is the fact of taxability of entire income of the person in the residence State, rather than the mode of taxability there, which should govern whether or not the source country should extend treaty entitlement with the Contracting State in which that person has fiscal domicile. In effect thus, even when a partnership firm is taxable in respect of its profits not in its own right but in the hands of the partners, as long as entire income of the partnership firm is taxed in the residence country, treaty benefits cannot be declined……….. 75. A view is thus indeed possible that, given the context in which the expression ‘liable to taxation by reasons of his domicile, residence, place of management or any other criterion of similar nature’ is employed i.e., in the context of ascertaining fiscal domicile - as evident from the title of article as ‘Fiscal domicile’, it is sufficient that under the assignment or distributive rules of the treaty, the residence State has a right to tax income of the partnership firm - irrespective of the fact the position whether or not such a right is actually exercised by the residence State. The undisputed objective of article 4 is to ascertain fiscal domicile of a person, and the heading of article 4, as we have reproduced earlier in this order, is "Fiscal domicile". In our humble understanding, as long as de facto entire income of the enterprise or the person is subjected to 23

I.T.A.No.1774/Del/2022

tax in that tax jurisdiction, whether directly or indirectly, the taxability test must be held to have been satisfied. Of course, the other possible approach to such a situation is that as long as the tax jurisdiction has the right to tax the entire income of the person resident there, whether or not such a right is exercised, the test of fiscal domicile should be satisfied. Viewed thus, all that matters is whether that tax jurisdiction has a right to tax or not; the actual levy of tax by the tax jurisdiction cannot govern whether a person has fiscal domicile in that jurisdiction or not………. 79. In view of the above discussions, as also bearing in mind the entirety of the case, we hold that the Assessee was indeed eligible to the benefits of India-UK tax treaty, as long as entire profits of the partnership firm are taxed in UK — whether in the hands of the partnership firm though the taxable income is determined in relation to the personal characteristics of the partners, or in the hands of the partners directly. To that extent, objection taken by the learned Departmental Representative, on the question of admissibility of India-UK tax treaty benefits, is held as maintainable but rejected on merits......”

situation of the assessee. Reliance placed by the Ld. DR on the

decision of the coordinate bench in the case of Go Daddy.com LLC

Vs. DCIT in ITA No.8085/Del/2018 dated 23.09.2022 is of no help to

the Revenue. Perusal of the order of the Tribunal in the case of Go

Daddy.com LLC (supra), we find that the assessee in that case did not

claim any benefit under the India-USA tax treaty as regards the

disputed issue of the income received from web hosting services, web

I.T.A.No.1774/Del/2022

designing, SSL certification services etc. The Tribunal has

categorically given a finding to this effect observing as under:

“12. We have considered rival submissions in the light of the decisions relied upon and perused the material on record. Before we proceed to decide the issue on merit, we must make it clear that learned counsel appearing for the assessee has categorically submitted before us that the assessee is not claiming any benefit under the India-USA Tax Treaty as regards the disputed issue. In view of the aforesaid submission of learned counsel appearing for the assessee, we confine ourselves to examine the issue, as to whether, the amount received by the assessee from registration of domain name amounts to royalty under section 9(l)(vi) of the Act.”

above decisions, we hold that the assessee is a tax resident of USA

and is entitled for the benefit of DTAA between India-USA. Ground

no.2 of grounds of appeal of the assessee is allowed.

assessee challenged the order of AO/DRP with respect to taxability of

income from domain name registration, web hosting, web designing,

SSL certification services, etc. We observed that in the final

assessment order the AO held that income is in the nature of

technical services and is taxable in the hands of the assessee

company as fees for included services under India-USA DTAA

observing as under: 25

I.T.A.No.1774/Del/2022

“In the instant case the consultancy services are of technical nature, therefore, such services are included services as per the MOU. However, the taxability of such services would require crossing the “make available” clause threshold. The term ‘make available’ means that the person acquiring the service is enabled to independently apply the technology. The word ‘enable’ is used in the sense that the technical services should be such that they make the recipient able or wiser in the subject matter. Thus, where the recipient of technical services does not get equipped with the knowledge or expertise and the recipient would not be able to apply it in future independently without support from the service provider, it will not be a case of technical service having been ‘made available’. In the instant case, the CRM software solution was made available to the Indian customer-users so that they can, use this for data analytics independently without the support of the assessee company. Assessee also imparts training to employees of Indian customer- users so as to enable them to act independently. The customer- users are held responsible for any damage to the software. These are attributes of independent performance. Moreover, as per the examples provided in the MOU to the India-USA DTAA, the imparting of “technical training” per se is indicative of fulfillment of the fact that the consultancy service is made available to the users. In view of this, the income in the nature of technical services is taxable in the hands of the assessee company as Fees for Included Services under India- USA DTAA.” 19. However, the assessee made the following elaborate

submissions before us submitting that the income from domain name

registration, web hosting, web designing services etc. do not make

I.T.A.No.1774/Del/2022

available any technical knowledge, experience, skill, knowhow or

process and the consideration received for rendering such services

should fall outside the ambit of FIS as per Article 12(4)(b) of the

India-USA DTAA:

“Ground No. 3: Taxability of Income earned on account of Domain Name Registration Services, web hosting, web designing, SSL certification services etc. amounting to INR 7,49,03,087/- 49. During the year under consideration, the Appellant earned income amounting to Rs. 7,49,03,087/-from Indian customers for providing domain name registration, web hosting, web designing, SSL certification services and sale of on-demand products. The aforesaid services are explained as under: Domain name registration and transfer services: • A website is a combination of files, images, text, music etc. Each website on the internet has a unique identity, called Internet Protocol address (“IP address”), which could be used to connect to that particular website. An IP address is a series of numbers, which is unique to each website. For instance, the IP address of the website of ITAT is “164.100.58.114”. Any person with internet access can type in the website’s IP address that he wishes to browse on his device to access that website. However, it is impractical to remember each website’s IP address. To solve this problem, each website’s IP address is assigned a domain name i.e. a name which can consist of alphabets and numbers and which a user can type on the internet (instead of IP address) to reach a website l. For instance, the domain name of the website of ITAT is “www.itat.gov.in”. • Internet Corporation for Assigned Names and Numbers (“ICANN”) formulates policies and inter alia helps in coordinating and supporting the

I.T.A.No.1774/Del/2022

registration and maintenance of domain names. For this purpose, ICANN enters into agreements with ‘registries’, who are in charge of and maintain a database of all the domain names. Each registry is certified by and subject to the direct supervision of ICANN. • Furthermore, ICANN has accredited over 2400 companies to act as ‘registrars’ (like the Appellant) whose function is to register the domain names of the customers/ registrants and facilitate the entire domain name registration process. • In a typical domain name registration process, a ‘registrant’ (i.e. the customer), desirous of registering a domain name would approach a registrar such as the Appellant. The Appellant would then ask the relevant registry whether the proposed domain name is available. The registry would check its database and inform the registrar accordingly. If the domain name as requested by the registrant is available i.e. it is not registered in the name of anyone else, the customer would pay a fee and get the name registered with the help of the registrar. • For instance, M/s ABC Private Limited (i.e. Registrant) aims to establish its online presence on the internet and intends to register a domain name for its website “ABCPL.com”. In order to register such domain name, ABC Private Limited may visit the website of the Appellant and check the availability of the domain name. The Appellant’s system would then run a query and check the availability of the domain name from the database of maintained with relevant “Registry”. If the said domain name is available, the Appellant’s website would inform the Registrant of its availability pursuant to which, the Registrant would make the payment for registering the domain name, apart of which would be shared by the Appellant (i.e. the Registrar) with the “Registry” and “ICANN”.

I.T.A.No.1774/Del/2022

In the year under consideration, the appellant has earned INR 4,40,27,135 from such services. Website hosting and e-mail:

• Web hosting is an online service that makes customers website’s content accessible on the internet. When a customer purchases a hosting plan, the Appellant merely provides a space on the server to store the content of the website. • A web hosting provider (like the Appellant) is the one who gives a website its IP address and provides server storage space for the website. The website on that server can then be accessed from a web browser (such as Google Chrome). Accordingly, when someone types www.itat.gov.in, the web browser goes to the hosting provider’s web server to pull up the pages for the website that it has stored on its server. • To put it simply, if the domain name is the address of a house, then the web hosting is the actual house that the address points to. A domain name system is like a massive address book that is constantly updated. Behind each domain name, there is an address of the web hosting service storing the website’s files. Without domain names, it will not be possible for people to find a website and without web hosting a website cannot be active. • Accordingly, when someone enters the domain name in a browser, the domain name is translated into the IP address of the web hosting company’s computer which contains the website’s files, and it downloads the contents of the webpage on to user’s computer. The Registrar merely plays the role of storing the website files of a domain name hosted by it and pulls up the files of such domain name upon request raised by the user. • WWD LLC provides web hosting services wherein it hosts the website of its users on its servers/ dedicated servers located outside India. Such

I.T.A.No.1774/Del/2022

websites are accessible from the servers by anyone on a 24x7 basis. Additionally, it also offers to install and configure supporting applications for such websites on its servers. • The Appellant is responsible for keeping the server up and running, implementing hosting security measures, and ensuring that data such as texts, photos, and other files are transferred successfully to the visitors’ browsers who access the website. • It is relevant to note that the Appellant neither exercises any control over the customers contents hosted in the data center nor is responsible for the same. Further, the Appellant does not develop the contents. • These services can neither be replicated by the customer nor is any knowledge provided to the customer. Web Designing services: • Web designing is the process of creating a website which focusses on the design factors of the website like layout, user interface and other visual imagery in order to make the website more visually appealing and easy to use. It involves planning, conceptualizing, and implementing the plan for designing a website in a way that is functional and offers a good user experience. • WWD LLC allow its users to develop their own websites/webpages by using the development tools and applications which are available online on its website. It also assists its users in creating various designs for website header, website content, website logo, business card, letterhead etc., so that the users can build their own website. The relevant tools and applications required for the above services are available on the website of WWD LLC itself. Secure Sockets Layer (“SSL”) certification services: 30

I.T.A.No.1774/Del/2022

• WWD LLC is a Certifying Authority (“CA”') and is eligible to issue SSL certificates to the users, who request for such certificate for a defined consideration. The customers approach the Appellant to obtain such certification. • An SSL certification is a certification which certifies the veracity and genuineness of the website. An SSL certificate is not really necessary to secure a data, but such a certificate ensures that the certificate holder is really who he claims to be. Without a trusted signed certificate, while the data may be encrypted, the party with whom the communication is being undertaken may not be the one who is the intended recipient of the communication. • When a website is secured by an SSL certificate, the acronym HTTPS (which stands for HyperText Transfer Protocol Secure) appears in the website address. Without an SSL certificate, only the letters HTTP - i.e., without the S for Secure - will appear. For instance, a secured website like Amazon, where a payment has to be made, will always obtain such certificate from a certifying authority (like the Appellant) to assure its customers that the data and credit card information is protected and safe pursuant to which its domain name will be preceded by HTTPS. • An SSL certificate is also represented by way of a padlock icon in the address bar on the web browser which ensures the trust and reassurance to those visiting the website that the website is secure. In the year under consideration, the appellant has earned INR 3,08,75,952 from web hosting services, web designing, SSL certification services 50. At the outset, it is humbly submitted that the Ld. AO has concluded the assessment proceedings of the Appellant on the basis of incorrect facts which, respectfully, shows lack of application of mind on part of the Ld. AO. 31

I.T.A.No.1774/Del/2022

I.T.A.No.1774/Del/2022

In view of this, the income in the nature of technical services is taxable in the hands of the assessee company as Fees for Included Services under India-USA DTAA.’’ 52. With regard to the above, it is most humbly submitted that as per section 90(2) of the Act, a non- resident has the option of being taxed in India under provisions of the Act or provisions of the DTAA entered between India and the country of residence of such non¬resident, whichever is more beneficial. The Appellant, being a resident of the U.S. under Article 4 of the DTAA is eligible to invoke provisions of the DTAA to the extent they are more beneficial to the Appellant. 53. It may be noted that Article 12(4) of the India- U.S. tax treaty defines the phrase “Fee for Included Services” in a restrictive manner and provides that payments for technical or consultancy services would be considered FIS only if the ‘make available’ condition is satisfied. 54. With regard to the above, it would be relevant to draw reference to Memorandum of Understanding (“MOU”) entered between India and the U.S. to understand the meaning of the term “make available” wherein the term has been defined with suitable examples. 55. The MOU entered between India and the U.S. for “royalties and fee for included services” provides that for a fee to be regarded as fee for included services, the underlying assumption is that the same makes available any technical knowledge, experience, skill, know-how or process which enables the person acquiring the services to apply the technology. According to the MOU, mere rendering of services is not taxable as FIS unless the service recipient is able to make use of the technical knowledge, etc. without recourse to the performer of the services in future. A transmission of the technical knowledge, experience, skills, etc. from the person rendering the services to

I.T.A.No.1774/Del/2022

the service recipient is contemplated under the meaning of FIS. 56. The above understanding has been endorsed by various judicial authorities including the Hon’ble Karnataka High Court in the case of CIT vs. De Beers India Minerals (P) Ltd. [2012] 346 ITR 467 where the court held that in order to fit into the terminology “make available”, the technical knowledge, skill, etc., must remain with the service recipient even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider has gone into it. The relevant extract of the judgement is reproduced hereunder for Your Honours’ kind perusal:- “22. What is the meaning of "make available". The technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skill?, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to 34

I.T.A.No.1774/Del/2022

apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied. 27. In the background of the aforesaid principles and facts of this case, it is clear that assessees acknowledge the services of Fugro for conducting aerial survey, taking photographs and providing data information and maps. That is the technical sendees which the Fugro has rendered to the assessees. The technology adopted by Fugro in rendering that technical services is not made available to the assessees. The survey report is very clear. Unless that technology is also made available, the assessees are unable to undertake the very> same survey independently excluding Fugro in future. Therefore that technical services which is rendered by Fugro is not of enduring in nature. It is a case specific. That information pertains to 8 blocks. The assessees can make use of the data supplied by way of technical services and put its experience in identifying the locations where the diamonds are found and carrying on its business. But the technical services which is provided by Fugro will not enable the assesses to independently undertake any survey either in the very same area Fugro conducted the survey or in any other area. They did not get any enduring benefit from the aforesaid survey.«In that view of the matter, though Fugro rendered technical services as defined under Section 9(1) (vii) Explanation 2, it does not satisfy the requirement 35

I.T.A.No.1774/Del/2022

of technical services as contained in DTAA. Therefore the liability to tax is not attracted. Accordingly the first substantial question of law is answered in favour of the assessees and against the Revenue. (Emphasis Supplied by us) 57. In the instant case, it is relevant to note that the Appellant offers various packages to its customers for registration of different types of domain name (such as .com, .in, .shop etc.), hosting their websites on its servers, procure various tools for designing their web pages and avail other web services. Such services remain active for a fixed time period. Upon expiry of such fixed period, the service package is required to be renewed and the users are not permitted to continue using such services on their own. Furthermore, the users are not equipped to apply or deploy such services on their own independently without resorting back to the Appellant. Accordingly, rendition of such services in no manner makes available any technical knowledge, experience, skill, know-how, or processes or involves development or transfer of any technical plan or technical design to the users. 58. Finally, reliance is also placed on the decision of Hon’ble Ahmedabad Tribunal in the case of Esm Sys Pvt. Ltd. vs. ITO [TS-347-ITAT-2020(Ahd)] wherein the Tribunal held that payment of web hosting charges by the Appellant to a U.S. Co. do not constitute FIS as it does not involve any sharing of knowledge or know- how or any technology or fulfils the ‘make available’ condition as enshrined in Article 12(4) of India-U.S. tax treaty. 59. In view of the above contentions and legal jurisprudence, it is humbly submitted that the income from domain name registration, web hosting, web designing services etc. do not ‘make available’ any technical knowledge, experience, skill, know-how, or processes and the consideration received for rendering

I.T.A.No.1774/Del/2022

such services should fall outside the ambit as FIS as per Article 12(4)(b) of the India-US DTAA.” 20. On perusal of the assessment order, we find that the AO very

cryptically and without examining the nature of services and how

make available clause in Article 12 of India-USA DTAA is applicable to

the assessee with respect to the nature of various services rendered

by the assessee held that income of the assessee is in the nature of

technical services and is taxable in the hands of the assessee

company as Fees for Included Services (FIS) under India-US DTAA. We

further observed that the AO held that the treaty benefits are not

available to the assessee and in coming to such conclusion the AO has

not gone in detail in respect of the nature of services rendered by

the assessee and the applicability of clause 4 of Article 12 of India-

USA DTAA. We also observed from the order of DRP that this issue

was not gone into in detail by DRP on the submissions made by the

assessee on the nature of services rendered by it. Therefore, having

held by us that the assessee is entitled for the treaty benefits under

India-USA DTAA, we restore this issue to the file of the AO to

examine the applicability of the provisions of DTAA viz-a-viz various

services rendered by the assessee and the income received thereon

under the provisions of India-USA DTAA and pass a speaking order

I.T.A.No.1774/Del/2022

after providing adequate opportunity of being heard to the assessee.

Ground no. 3 of grounds of appeal of the assessee is partly allowed.

respect to levy of interest u/s 234A, 234B and 234D of the Act.

These grounds are restored to the files of the AO.

of initiation of penalty proceedings u/s 270A of the Act. This ground

is premature at this stage the same is restored to the file of the AO.

indicated above.

Order pronounced in the open court on 29/07/2024

Sd/- Sd/- (G.S. PANNU) (C.N. PRASAD) VICE PRESIDENT JUDICIAL MEMBER Dated: 29/07/2024 *Kavita Arora, Sr. P.S. Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. By order

Assistant Registrar, ITAT: Delhi Benches-Delhi