ITO Vs Hari Krishna Exports Private Limited (ITAT Mumbai)
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) dismissed the Revenue’s appeals for Assessment Years 2013-14 and 2014-15 in the case of Hari Krishna Exports Private Limited, holding that payments made to foreign entities towards diamond grading and certification services were not in the nature of Fees for Technical Services (FTS).
The assessee was engaged in importing, manufacturing, trading and exporting diamonds and manufacturing and exporting jewellery. Pursuant to a spot verification under Section 133A(2A) of the Income-tax Act, the Revenue noticed that the assessee had made payments to non-resident entities towards diamond grading and certification charges without deducting tax at source under Section 195.
The Assessing Officer treated the payments as Fees for Technical Services chargeable to tax in India and consequently treated the assessee as an assessee in default under Section 201(1), along with consequential interest under Section 201(1A).
The CIT(A), however, deleted the demand, holding that diamond grading and certification did not constitute FTS. The Revenue challenged the decision before the Tribunal.
Tribunal’s Findings
The Tribunal examined whether the payments constituted Fees for Technical Services under Section 9(1)(vii), whether the payments to GIA, USA satisfied the more restrictive “make available” test under Article 12(4) of the India-USA DTAA, and who was the actual recipient in respect of payments made to entities situated in Thailand and Hong Kong.
The Tribunal noted that GIA examined the diamonds submitted by the assessee and issued independent grading reports describing physical characteristics such as cut, colour, clarity and carat weight. There was nothing on record to establish that GIA imparted its grading methodology, scientific process, technical standards or specialised know-how to the assessee.
The receipt of a grading certificate did not enable the assessee to undertake GIA’s certification independently. For every subsequent certification, the assessee was required to approach GIA afresh. The service therefore culminated in an independent certification rather than transfer of technical knowledge or skill.
Diamond Grading Not Technical Services under Section 9(1)(vii)
The Tribunal held that merely because a service provider uses specialised knowledge, scientific equipment or technically qualified personnel, every payment for such service does not automatically become Fees for Technical Services.
The relevant consideration is the nature of the service rendered to the recipient.
In the present case, GIA merely examined the diamonds and issued an independent grading report certifying their physical characteristics. It did not provide technical advice, technical solutions or consultancy to the assessee, nor did it perform any managerial function.
The grading report did not assist the assessee in manufacturing diamonds or enable it to improve or alter their characteristics. The service was essentially one of independent evaluation and certification of an existing product.
Accordingly, the consideration could not be characterised as consideration for managerial, technical or consultancy services within the meaning of Explanation 2 to Section 9(1)(vii).
Reliance on Diamond Services International
The Tribunal relied upon the decision of the jurisdictional Bombay High Court in Diamond Services International (P.) Ltd. v. Union of India, wherein grading of diamonds and issuance of grading certificates was held not to result in transfer of technical skill, knowledge or industrial or commercial experience to the customer.
The Tribunal observed that similar principles had also been recognised in decisions concerning certification services, distinguishing them from technical services involving transfer of know-how.
“Make Available” Test under DTAA
The Tribunal alternatively examined the issue under the applicable Double Taxation Avoidance Agreements.
It noted that Article 12(4) of the India-USA DTAA and India-UK DTAA contains a narrower definition of technical or consultancy services and requires the technical knowledge, experience, skill, know-how or processes to be “made available” to the recipient.
The “make available” requirement means that the recipient must be enabled to apply the technical knowledge or skill independently in the future without having to depend upon the service provider.
GIA’s grading reports did not impart any grading methodology, scientific process, technical standards, know-how or specialised expertise to the assessee. The assessee therefore did not acquire the capability to undertake grading or certification independently.
Consequently, even assuming that the payments could be regarded as technical services under domestic law, they did not satisfy the “make available” requirement under Article 12(4) of the applicable DTAAs.
Business Profits and Absence of Permanent Establishment
The Tribunal held that the receipts would consequently be taxable only as business profits under the applicable treaty.
Since the recipients did not have a Permanent Establishment in India, the receipts were not taxable in India.
The Tribunal also referred to an earlier coordinate Bench decision which had held, in the case of GIA, USA, that the entity did not have a Permanent Establishment in India and its receipts were therefore not chargeable to tax in India as business profits.
Section 195 TDS Obligation
The Tribunal relied upon the Supreme Court judgment in GE India Technology Centre (P.) Ltd. v. CIT, which authoritatively held that the obligation to deduct tax at source under Section 195 arises only where the sum payable to the non-resident is chargeable to tax under the provisions of the Act.
Once the receipts from diamond grading and certification were found not to be chargeable to tax in India, the foundation for invoking Section 195 disappeared.
Payments to Thailand and Hong Kong Entities
With regard to payments made to entities situated in Thailand and Hong Kong, the Tribunal held that the Revenue had sought to tax the remittances solely on the basis that they constituted Fees for Technical Services under Section 9(1)(vii).
Since the Tribunal had already concluded that diamond grading and certification did not constitute managerial, technical or consultancy services, the identity or location of the non-resident recipient could not alter the character of the payment.
The Revenue had also not established that the payments were otherwise chargeable to tax in India under any other provision or demonstrated the existence of a business connection or other taxable nexus in India.
Revenue’s Judicial Precedents Distinguished
The Tribunal considered the decisions relied upon by the Revenue, including Intertek Testing Services, G.V.K. Industries, Continental Construction and Oberoi Hotels.
It held that those decisions arose in different factual and statutory contexts involving consultancy, technical advisory or professional services. None dealt with certification or grading services of the nature involved in the present case.
Accordingly, those authorities did not advance the Revenue’s case.
Conclusion
The Tribunal found no infirmity in the CIT(A)’s order holding that the assessee could not be treated as an assessee in default under Section 201(1) and that interest under Section 201(1A) could not be levied in respect of payments made for diamond grading and certification services.
The Revenue’s grounds for Assessment Year 2013-14 were dismissed.
Applying the same reasoning mutatis mutandis to Assessment Year 2014-15, the Revenue’s grounds for that year were also dismissed.
Result: Appeals filed by the Revenue for Assessment Years 2013-14 and 2014-15 were dismissed.
List of Cases Discussed / Relied Upon
1. Diamond Services International (P.) Ltd. v. Union of India – (2008) 304 ITR 201 (Bombay High Court)
2. ITO v. Star Rays – (2022) 139 taxmann.com 437 (ITAT Surat)
3. CIT (IT) v. Star Rays – (2023) 153 taxmann.com 226 (Gujarat High Court)
4. TUV Bayren (India) Ltd. v. DCIT – 23 taxmann.com 127
5. GE India Technology Centre (P.) Ltd. v. CIT – (2010) 327 ITR 456 (Supreme Court)
