Service tax on domain names under franchise services
A recent CESTAT Judgment (Appeal No.ST/491/12, Order No : A/524/14/EB/C-II) came as big relief to Domain providers in India, which stats accreditation and representing ICANN are two different things and the appellants are only accredited by ICANN and they are not representing ICANN – appellants cannot be said to be providing franchise service of the associate franchisor of ICANN – since appellant cannot be considered as a franchise of ICANN, therefore, resellers cannot be considered as franchise of the associate franchisor – Demands set aside and appeals allowed: CESTAT
What was case :: In 2010, many Domain providers in India got notice from Service tax department to pay Service tax on domain names for their purchase from ICANN and associated registries ( Verisign for com, PIR for org, Afilias for info etc ) for period from March 2006 onwards as Input Service Tax as Franchise services. Against this DIRECTI INTERNET SOLUTIONS PVT LTD gone into CESTAT (Appeal No.ST/491/12) . Also a second notice was served for same period to Registrar selling Domains to their reseller under same clause of Franchisee Services.
After various arguments from both side, Appellate Tribunal given judgment in favor of Directi Internet Solutions Pvt. Ltd. The details of basic findings given below in this page.
Reason, Conclusion and Impact for Domain Industry in India of this Judgement :: Before July, 2012 when Negative List in service was introduced, there was no clarity on many services whether they fall under service tax or not. Same was the condition for Domain Name Registrations. In 2010, ST Department slammed many Indian Domain Registrars with Notice to pay from a retrospective date of March 2006. As most of the companies never charged any Service Tax in Domain Registration as this doesn’t fall under any classification of services described in ST norms.
FROM JULY 2012 :: This judgment brings a clear light on this. Though from July, 2012, New regime of Service Tax was introduced where negative list was provided. And all services which doesn’t fall in Negative List of Service Tax, by default comes under Service Tax. For details on service tax on domain and hosting after that you can refer Service Tax on Domain and Hosting.
Want to make clear, after a lot of people confused, Service tax is applicable on Domain and Hosting both with reverse charge mechanism from July, 2012. If you are buying from a Foreign company ( Godaddy, Resellerclub, ENOM ) you need to pay on your purchase under Reverse Service Tax.
Observations of Tribunal:
++ From the mission and core values as also the agreement between ICANN and the appellant we are not able to find out any service or a process for which ICANN is associated and is being provided by the appellant. Appellants provided registrar service as per the powers under Article II of powers for ICANN, ICANN “from acting as registrar. We find what is being done by the ICANN is to set minimum standards for the performance of registration function and recognize that the appellants are meeting those standards. Revenue has not been able to pinpoint to us either any service or any process for which is known and that process is being used or being provided by the appellants. In the absence of any such service or process we are unable to agree with the Revenue that the appellants are franchise service of ICANN.
++ We find that agreement between ICANN and Registry has not been produced either by Revenue or the appellant. We find that Revenue have not been able to bring on record any service or process identified with ICANN which is required to be provided by various registries accredited by ICANN. It appears that registries are also accredited like registrars. ICANN might have provided minimum standards for registries but that does not imply that registries are providing any service or process identified with ICANN. A reading of the above mentioned agreement clearly indicates that this is an agreement between registry and the appellant and has nothing to do with ICANN and under the circumstances we are not able to persuade ourselves that the appellants are providing franchise service of the associate franchisor of ICANN (i.e. registries).
++ Coming to the second Show Cause Notice, which is between the appellant and reseller, the appellant have appointed a large number of resellers all throughout the world who are required to sell the products and services of the appellants. We find that the agreement is of a nature of principal to principal basis and resellers cannot be considered as franchisee or associate franchisor of ICANN. We have already held earlier that appellant cannot be considered as a franchisee of ICANN and, therefore, resellers cannot be considered as franchisee of the associate franchisor.
++ Revenue’s contention that the resellers are providing the franchisee services of ICANN does not hold water, hence there is no strength in the second demand notice also.
++ Demands set aside and appeals allowed.
Directi Internet Solutions Pvt Ltd Vs Commissioner of Service Tax (CESTAT Mumbai), Appeal No.ST/491/12, Date of Decision: 5.8.2014