Implications of the recent verdict on Service Tax for Resellers

We have some great news for all of you! Directi which has been at the forefront of the effort to resolve the stand-off on service tax on domain name registration services in India, has been successful in obtaining a favorable verdict for all domain name transactions prior to July 2012!

Following legal proceedings to determine the accurate interpretation of the Service Tax law in a case where the opposing parties were Directi Internet Solutions Private Limited and the Commissioner of Service Tax, Mumbai-II, the CESTAT (Custom, Excise & Service Tax Appellate Tribunal) announced on 5th August 2014 that Service Tax is not leviable on Domain Name Registration Services rendered prior to July 2012, as they are not covered under the definition of Franchise Services.

Reading the verdict

The outcome of the recent judgment will have an impact only on the Service Tax demands raised by the Service Tax authorities for the services rendered prior to July, 2012.  As a result of the verdict, Service Tax under on Domain Name registration services rendered before the year 2012 will not be charged.

What changed in July 2012

The definition of “service” was introduced in the 2012 Finance Act as “any activity carried out by a person for another for consideration and including a declared service”. In July 2012, the government introduced a new law for levy of Service Tax. Services that appear in the Negative List are exempt from Tax, while the ones that do not appear on this list are taxable services. Domain Name registration services are not a part of the exempted list and will hence be taxable starting July 2012.

Rationale behind the verdict

The Service Tax commission contended that all organizations accredited by ICANN were treated as organizations representing ICANN and were hence liable to pay Service Tax under the category of Franchise Services under the laws that were in force prior to July 2012. But according to the latest verdict, Service Tax which was charged on Resellers for representing and being associated with ICANN will not be levied as Resellers and Domain Registration organizations are not its associate franchisors – again applicable only to transactions prior to the introduction of the revised laws .

How Directi went about the Dispute & the appeals process

Directi decided to counter the Service Tax issue by presenting all arguments to CESTAT. Extensive submissions were made by the Commissioner of Service Tax as well. CESTAT then minutely went through the agreement between ICANN and the appellant in the backdrop of the terms “Franchisee” and “Franchisor” as defined under the sections of the Finance Act.

As per all the observations made, CESTAT reached a conclusion and declared that the penalties and demands are unsustainable.

Arguments put forward by Directi

  1. Activities carried out by Directi does not qualify as ‘Franchise Services’ as the 2 main criteria laid down in the definition of franchise services are missing in the present case which are as below:-
  • The grant of representational right
  • Identification with the franchisor

None of the above mentioned services are granted to Directi.

  1. Directi is only accredited by ICANN and not representing ICANN.
  2. Agreements entered into by the Directi with ICANN does not indicate any Franchisor-Franchisee relationship
  3. Registries are not Associate franchisors of ICANN.
  4. Resellers are prohibited from using ICANN name and logo for branding purposes.
  5. The relation between Directi and Reseller is on principal to principal basis and reseller cannot be considered as franchisee or associate franchisor of ICANN.
  6. Directi cannot be considered as franchisee of ICANN and resellers cannot be considered as franchisees of associate franchisor of ICANN.

Although the verdict is applicable only on transactions prior to July 2012, this recent verdict is testimony to Directi’s continuous efforts to safeguard the best interests of its resellers. We believe that the judgment brought about by Directi’s case is a landmark decision but in view of the revised laws, we strongly suggest that you adhere to the law and abide by the jurisdiction applicable to you.

Please contact your account managers for any more information or clarifications related to the verdict.