ITAT: Diamond Grading Charges Not FTS u/s 9(1)(vii); No TDS u/s 195

ITO Vs Hari Krishna Exports Private Limited (ITAT Mumbai)

Summary:

Diamonds Travel Abroad for Certification

Hari Krishna Exports Private Limited was engaged in importing, manufacturing, trading & exporting diamonds and manufacturing & exporting jewellery.

During the relevant years, the assessee made payments to various non-resident entities for diamond grading & certification services without deducting tax u/s 195.

For AY 2012-13, payments were made to entities in Hong Kong, South Africa & Botswana; for AY 2015-16, to an entity in Thailand; for AY 2018-19, to entities in the USA, UK, Belgium, Hong Kong, Botswana & South Africa; and for AY 2019-20, to entities in the USA, UK, Belgium, Botswana & South Africa.

The AO characterised the payments as FTS chargeable to tax in India. Consequently, the assessee was treated as an assessee in default u/s 201(1) & consequential interest was levied u/s 201(1A).

The CIT(A) deleted the demands, holding that the grading charges did not constitute FTS. The Revenue carried the matter to the ITAT.

What Exactly Did the Grading Agencies Do?

The foreign grading agencies examined the diamonds submitted by the assessee & issued independent reports specifying physical characteristics such as cut, colour, clarity & carat weight.

The assessee contended that the reports merely certified the attributes of the particular diamonds examined. The agencies did not render managerial or consultancy services, provide technical advice or transfer their grading methodology to the assessee.

Receiving a grading certificate did not enable the assessee to grade other diamonds independently. For every subsequent diamond, it had to approach the agency afresh. Thus, the engagement ended with the issuance of an independent certification rather than the transmission of technical capability.

Revenue Points to Specialised Expertise

The Revenue argued that diamond grading required specialised scientific knowledge, sophisticated equipment, trained personnel & internationally recognised technical standards.

It emphasised that the reports enhanced the diamonds’ credibility, marketability & acceptance in the international market. According to the Revenue, the significant commercial benefit derived from such certification established the technical character of the services.

The Revenue therefore defended the demands raised u/s 201(1) & interest charged u/s 201(1A).

Technology Used Is Not Technology Transferred

The ITAT held that the mere use of specialised knowledge, scientific equipment or technically qualified personnel by the service provider does not automatically make every payment for the resultant service FTS.

The correct test is the nature of the service actually rendered to the recipient. In the present case, no technical advice or solution was offered, no consultancy was provided & no managerial function was performed. The service was confined to examination of a diamond and certification of its characteristics.

The agencies did not impart their grading methodology, scientific processes, technical standards or specialised know-how. Consequently, the assessee acquired no enduring technical ability to undertake grading independently.

The commercial advantage arising from a recognised certificate could not alter the essential nature of the service. Marketability of the result is not the same as transfer of technical knowledge.

Different Countries, Same Character

The Revenue sought to distinguish the years on the ground that the foreign recipients were located in different jurisdictions. The ITAT rejected this approach.

The character of a payment depends upon the nature & substance of the underlying service, not merely upon the identity or geographical location of the recipient. Across all countries, the activity remained the same: examination of diamonds followed by issuance of independent grading reports.

The Tribunal followed its coordinate bench ruling in the assessee’s own case for AYs 2013-14 & 2014-15, where identical services had already been held not to constitute FTS.

It also noted the decision in ITO v. Star Rays, subsequently affirmed by the Gujarat High Court, concerning payments to GIA through its laboratories outside the USA.

“Make Available” Test Also Not Satisfied

In respect of payments to entities in the USA & UK, the applicable DTAAs contained the “make available” requirement.

The grading agencies did not make available any technical knowledge, experience, skill, know-how or process that could enable the assessee to apply the technology independently in future. Therefore, the payments could not qualify as fees for included services or FTS even under the relevant treaty provisions.

For entities located in the other jurisdictions, the Tribunal held that the payments did not constitute FTS even under the domestic definition in Explanation 2 to section 9(1)(vii)). The Revenue had also failed to establish taxability under any other provision.

No Taxability Means No TDS

Following the Supreme Court ruling in GE India Technology Centre (P.) Ltd. v. CIT, the ITAT reiterated that the obligation u/s 195 arises only when the sum payable to the non-resident is chargeable to tax in India.

Since the grading charges were not taxable, there was no obligation to deduct tax. The assessee could therefore neither be treated as an assessee in default u/s 201(1) nor be charged consequential interest u/s 201(1A).

The Revenue’s appeals for all four assessment years were accordingly dismissed.

Key Takeaway

Technical expertise may be used behind the curtain without being handed across the counter. A certificate describing a diamond’s quality does not teach the customer how to grade diamonds. Where the service provider delivers only the result & retains its process, the payment does not become FTS merely because the task demands scientific expertise—or because the certificate makes the diamond shine brighter in the marketplace.

Cases Discussed

• Hari Krishna Exports Private Limited v. ITO, ITA Nos. 2474 & 2412/Mum/2026, order dated 30/07/2026, AYs 2013-14 & 2014-15.
• ITO v. Star Rays, [2022] 139 taxmann.com 437.
• CIT(IT) v. Star Rays, [2023] 153 taxmann.com 226.
• GE India Technology Centre (P.) Ltd. v. CIT, [2010] 327 ITR 456 (SC).

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT MUMBAI

Present appeals filed by the revenue arise out of the following orders:-

2. At the outset, it is noticed from the appeal record that there is a delay of 27 days in filing the appeals by the Revenue for AYs 2012-13 and 2015-16 before this Tribunal. Though no separate applications for condonation of delay have been filed by the Revenue, having regard to the short delay involved and upon perusal of the material available on record, we find that the delay is neither intentional nor deliberate. In the interest of substantial justice and considering the overall facts and circumstances of the case, we deem it appropriate to condone the delay of 27 days in filing the appeals.

Accordingly, the delay is condoned and the appeals filed by the Revenue are admitted for adjudication on merits.

3. Brief facts of the case are as under:-

The assessee is engaged in the business of importing, manufacturing, trading and exporting diamonds and manufacturing and exporting jewellery. During the relevant previous years, the assessee made payments to various non-resident entities towards diamond grading and certification charges without deducting tax at source u/s 195 of the Act. The Ld.AO treated the aforesaid payments as being in the nature of fees for technical services (FTS) chargeable to tax in India and, accordingly, treated the assessee as an assessee in default u/s 201(1) and levied consequential interest u/s 201(1A) of the Act.

3.1. The payments involved in the four appeals are to grading/certification entities situated in different countries. In AY 2012-13, the payments were made to entities situated in Hong Kong, South Africa and Botswana; in AY 2015-16, to an entity situated in Thailand; in AY 2018-19, to entities situated in USA, UK, Belgium, Hong Kong, Botswana and South Africa; and in AY 2019-20, to entities situated in USA, UK, Belgium, Botswana and South Africa. The controversy in all the appeals, however, centres around the same nature of payment, namely, consideration paid for obtaining diamond grading/certification reports.

3.2. The Ld.CIT(A), after considering the nature of the grading activity and the material placed on record, held that the impugned payments did not constitute FTS and that the same were not chargeable to tax in India. Accordingly, the demand raised u/s 201(1) and 201(1A) was deleted.

Aggrieved by the order passed by the Ld.CIT(A), the Revenue is in appeal before us for all the years under consideration.

4. The Ld.AR submitted that the issue is squarely covered by the decision of the co-ordinate Bench in the assessee’s own case for AYs 2013-14 and 2014-15 in ITA Nos. 2474 & 2412/Mum/2026, order dated 30/07/2026. It was submitted that, although the countries of the grading entities in the present appeals are different from those involved in the aforesaid order, the nature of services rendered remains identical.

4.1. The Ld.AR submitted that the grading entities merely examine the diamonds submitted by the assessee and issue an independent grading report setting out the physical characteristics of the diamonds, such as cut, colour, clarity and carat weight. The grading report is essentially a certification of the characteristics of the particular diamond examined and does not involve rendering of managerial, technical or consultancy services to the assessee.

4.2. It was submitted that there is no transfer of any technical knowledge, experience, skill, know-how or process to the assessee. The assessee does not acquire any capability to undertake the grading or certification independently merely by receiving the grading report. For every subsequent certification, the assessee is required to approach the grading entity afresh. Thus, the service culminates in issuance of an independent certification and not in transmission of technical knowledge or skill.

4.3. The Ld. AR further submitted that, in respect of payments to entities situated in the USA and UK, the relevant DTAAs contain the requirement of “make available”. Since no technical knowledge, experience, skill, know-how or process is made available to the assessee, the payments cannot be regarded as FTS/fees for included services even under the respective treaty provisions.

4.4. In respect of the payments to entities situated in Botswana, South Africa and Belgium, the Ld. AR submitted that the services do not fall within the ambit of managerial, technical or consultancy services even under the respective treaty provisions. Reliance was placed, inter alia, on judicial precedents dealing with inspection, testing, certification and quality examination services.

4.5. The Ld. AR also submitted that, in the case of payments made to GIA through its laboratories situated in Hong Kong and Thailand, the actual recipient was GIA, USA and the laboratories merely functioned as facilities through which the grading activity was undertaken. Reliance was placed on the decision of the Hon’ble Surat Bench of this Tribunal in ITO v. Star Rays reported in [2022] 139 taxmann.com 437, affirmed by the Hon’ble Gujarat High Court in CIT(IT) v. Star Rays reported in [2023] 153 taxmann.com 226.

4.6. It was, accordingly, submitted that the payments were not sums chargeable to tax in India and, consequently, no obligation to deduct tax u/s.195 arose. The Ld.AR therefore prayed for dismissal of the appeals filed by the Revenue.

5. The Ld.DR relied upon the orders passed by the Ld.AO and submitted that the grading and certification activity involves application of specialised scientific and technical knowledge, expertise and equipment. It was submitted that the assessee derived substantial commercial benefit from the grading reports, as the certificates enhanced the credibility, marketability and acceptability of the diamonds in the international market.

5.1. The Ld.DR submitted that the fact that the grading activity was undertaken outside India or that the assessee itself possessed knowledge of diamonds would not alter the character of the services rendered by the foreign entities. According to the Ld. DR, the payments were made precisely because of the specialised technical expertise and internationally recognised certification standards of the grading entities and, therefore, the same constituted FTS taxable in India.

5.2. The Ld. DR relied upon the judicial precedents referred to by the Ld. AO and supported the action of the Ld. AO in treating the assessee as an assessee in default u/s 201(1) and in levying interest u/s 201(1A).

We have perused the submissions advanced by both sides in light of the record placed before us.

6. The common issue arising in these appeals is whether the payments made by the assessee to various non-resident entities towards diamond grading and certification services constitute fees for technical services chargeable to tax in India, thereby giving rise to an obligation on the assessee to deduct tax at source u/s 195 of the Act.

6.1. At the outset, we note that the identical nature of services has already been examined by the co-ordinate Bench in the assessee’s own case for AYs 2013-14 and 2014-15 in ITA Nos. 2474 & 2412/Mum/2026 vide order dated 30/07/2026. In the said decision, the Tribunal, after examining the material placed on record, noted that GIA merely examines the diamonds submitted by the assessee and issues an independent grading report describing their physical characteristics such as cut, colour, clarity and carat weight. It was further observed that there was nothing on record to suggest that GIA imparted its grading methodology, scientific process, technical standards or specialised know-how to the assessee.

6.2. The co-ordinate Bench further held that merely because the service provider uses specialised knowledge, scientific equipment or technically qualified personnel while rendering a service, every payment made for such service would not, by itself, constitute FTS. The true test is the nature of the service actually rendered to the recipient. On the facts before it, the Tribunal found that no advice was rendered, no technical solution was offered, no consultancy was provided and no managerial function was performed.

6.3. We find the aforesaid reasoning to be directly applicable to the present appeals. The fact that the grading entities in the present appeals are situated in different countries does not, by itself, alter the nature of the services rendered. What is relevant for determining the character of the payment is the nature and substance of the service actually provided to the assessee. In the present case, the grading activity culminates in an independent report certifying the characteristics of the particular diamond examined. The assessee does not receive any technical methodology, process, know-how or skill which enables it to undertake such grading independently in future.

6.4. We, therefore, find no merit in the contention of the Revenue that the mere application of specialised expertise or technical equipment by the grading entity would convert the consideration paid for the resultant certification into FTS. The fact that the grading report may commercially enhance the credibility or marketability of the assessee’s diamonds cannot, in our view, alter the essential character of the service rendered.

6.5. We also note that the co-ordinate Bench, while considering the payments made to GIA, has held that the grading and certification services do not fall within the ambit of FTS as defined in Explanation 2 to section 9(1)(vii) of the Act. The Tribunal further observed that the identity or location of the non-resident recipient does not alter the character of a payment which is otherwise not in the nature of FTS under the Act.

6.6. Accordingly, so far as the payments made to entities situated in countries where the applicable DTAA contains the “make available” condition, the aforesaid conclusion is further fortified by the fact that no technical knowledge, experience, skill, know-how or process is made available to the assessee. The receipt, therefore, would not fall within the relevant treaty provision dealing with fees for technical services/fees for included services. The co-ordinate Bench has also reached the same conclusion in respect of the India-USA and India-UK DTAAs.

6.7. As regards the payments made to entities situated in the other countries, we have already held, on examination of the nature of the services, that the consideration does not constitute FTS under the domestic provisions of the Act. The Revenue has not brought on record any material to demonstrate that the impugned receipts are otherwise chargeable to tax in India under any other provision of the Act. Therefore, merely because the grading entities are situated in different jurisdictions, the character of the payment cannot undergo a change.

6.8. We also find that the decision of the co-ordinate Bench in the assessee’s own case specifically considered the Revenue’s reliance upon decisions concerning consultancy, technical advisory and professional services and distinguished the same on the ground that such decisions did not deal with certification or grading services of the nature involved before the Tribunal.

6.9. In the present appeals also, the Revenue has not brought any material on record to demonstrate that the grading entities imparted any technical knowledge, skill, know-how or process to the assessee. The services rendered remained confined to examination of the diamonds and issuance of independent grading/certification reports. Therefore, respectfully following the decision of the co-ordinate Bench in the assessee’s own case for AYs 2013-14 and 2014-15, and having regard to the nature of the services rendered in the present appeals, we hold that the impugned payments towards diamond grading and certification charges do not constitute fees for technical services chargeable to tax in India.

6.10. Once the impugned payments are held not to be sums chargeable to tax in India, the assessee cannot be fastened with an obligation to deduct tax at source u/s 195 of the Act. The Hon’ble Supreme Court in GE India Technology Centre (P.) Ltd. v. CIT reported in [2010] 327 ITR 456 (SC) has held that the obligation to deduct tax at source u/s 195 arises only when the sum payable to the non-resident is chargeable to tax under the provisions of the Act. The co-ordinate Bench, applying the aforesaid principle, has accordingly held that no obligation to deduct tax u/s 195 arose in respect of the grading and certification payments.

6.11. In view of the above discussion, we find no infirmity in the orders of the Ld. CIT(A) deleting the demand raised u/s 201(1) and consequential interest charged u/s 201(1A) of the Act.

Accordingly, the grounds raised by the Revenue in all the four appeals are dismissed.

In the result, the appeals filed by the Revenue for AYs 2012-13, 2015-16, 2018-19 and 2019-20 stand dismissed.

Order pronounced in the open court on 31/08/2026.