TaxTMI 
TaxTMI 
2026 (8) TMI 205
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.... "1) Whether on the facts and in the circumstances of the case and in law the Learned CIT(A) is justified in not treating assessee in default u/s. 201 of the Act 2) Whether on the facts and in the circumstances of the case and in law the Learned CIT(A) is justified in ignoring the fact that the assessee failed to deduct TDS on the payments made to the foreign entities which were in the nature of FTS 3) Whether on the facts and in the circumstances of the case and in law the Learned CIT(A) erred in not considering the assessee in default for non-deduction of TDS under Section 195 of the Act on grading and testing charges aggregating to Rs. 2,68,02,600/- paid/credited to foreign parties 4) Whether on the facts and in the circumstances of the case and in law the Learned CIT(A) erred in ignoring the fact that AO rightly held that the payments made for diamond grading and testing constituted fees for technical services / fees are included services under section 9(1)(vii) of the Income-tax Act and relevant DTAA provisions?" Brief facts of the case for A.Y. 2013-14 are as under:- 3. The assessee is a domestic company engaged in the business of importing,....
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....(1A) was directed to be deleted. 4.2. As the appeal was allowed on merits, the ground challenged by the assessee regarding validity of the final assessment order on the issue of limitation was treated as academic. Aggrieved by the order of the Ld.AO, the revenue is in appeal before this Tribunal. 5. The Ld.AR submitted that the payments made to the Gemological Institute of America ("GIA") towards diamond grading charges do not constitute "fees for technical services" either under section 9(1)(vii) of the Act or under Article 12 of the India-USA DTAA and, therefore, no tax was deductible at source under section 195. It was submitted that the grading charges were paid only for obtaining independent diamond grading reports from GIA through its laboratories situated in Hong Kong and Thailand. He submitted that the grading report merely certifies physical characteristics of a diamond, such as cut, colour, clarity and carat weight, and serves only as an authentication of the diamond's identity and quality for the benefit of the ultimate purchaser. 5.1. The Ld.AR submitted that the diamonds are sent outside India for certification and the entire grading activity is carried....
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....at the Ld.AO misconstrued the expression "including the provision of services of technical or other personnel" occurring in Explanation 2 to section 9(1)(vii). According to the appellant, the said expression contemplates cases where technical personnel are deputed to render services to the recipient and does not mean that every service performed by technically qualified personnel automatically becomes a technical service. 5.5. The Ld.AR distinguished the authorities relied by the Ld.AO, namely, Intertek Testing Services, G.V.K. Industries, Continental Construction, CBDT v. Oberoi Hotels and Dean, Goa Medical College, by submitting that those decisions arose in materially different factual and statutory contexts and, therefore, had no application to the present case. The Ld.AR placed reliance on the decision of Hon'ble Bombay High Court in Diamond Services International (P.) Ltd. v. UOI reported in 304 ITR 201, wherein it was held that grading of diamonds and issuance of grading certificates do not involve transfer of technical knowledge, skill or industrial or commercial experience to the customer. Reliance was also placed upon the decision of coordinate bench of this Tribun....
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....ss income of GIA USA, which was not chargeable to tax in India in the absence of a permanent establishment. Consequently, the assessee had no obligation to deduct tax at source under section 195. 5.11. On the contrary, the Ld.DR supported the orders passed by the Ld.AO and submitted that, the payments made by the assessee to GIA for diamond grading and certification were in the nature of fees for technical services within the meaning of Explanation 2 to section 9(1)(vii) of the Act and were, therefore, chargeable to tax in India. Consequently, the assessee was under a statutory obligation to deduct tax at source under section 195 and, having failed to do so, was rightly treated as an assessee in default under section 201(1) of the Act. 5.12. It was submitted that diamond grading and certification are highly specialised activities requiring sophisticated equipment, scientific examination and the expertise of technically qualified gemologists. The grading report issued by GIA is not a routine certificate but is the result of an elaborate technical process undertaken by professionals possessing specialised knowledge and extensive experience in the field of gemology. The consider....
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....dered clearly demonstrated that the payments were made for highly specialised technical services and were liable to tax in India. The Ld. DR thus submitted that, decisions relied by the assessee, including Diamond Services International (P.) Ltd(supra), TUV Bayren (India) Ltd.(supra) and Star Rays(supra), were distinguishable on facts and did not govern the issue involved in the present appeal. According to the Revenue, those decisions were rendered in different factual and legal contexts and could not dilute scope of Explanation 2 to section 9(1)(vii) of the Act. 5.17. The Ld.DR thus placed reliance on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us. 6. The issue that needs to be addressed by us in the present case are: (i) whether the payment constitutes "fees for technical services" under section 9(1)(vii) of the Act, (ii) in case of payee being GIA, USA, whether the payment satisfies the more restrictive test of "fees for included services" under Article 12(4) of the India-USA DTAA and (iii) Who is the actual recipient of the payment in case of Hong Kong a....
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....ight). The activity culminates in the issuance of a certificate recording the attributes of the diamond as found upon examination. No advice is rendered to the assessee, no technical solution is offered, no consultancy is provided, nor is any managerial function performed. Equally, the grading report neither assists the assessee in the process of manufacture nor enables it to improve or alter the characteristics of the diamonds. The service is essentially one of independent evaluation and certification of an existing product. In these circumstances, the consideration paid by the assessee cannot be characterized as consideration for rendering managerial, technical or consultancy services within the meaning of Explanation 2 to section 9(1)(vii) of the Act. Consequently, the impugned payment does not constitute 'fees for technical services' under the provisions of the Act. 6.3. In the decision of Hon'ble jurisdictional Bombay High Court in Diamond Services International (P.) Ltd. v. Union of India (supra), relied by the Ld.AR Hon'ble High Court held that, the activity of grading diamonds and issuing grading certificates did not result in the transfer of any technica....
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....ervice is insufficient to satisfy this requirement. What is relevant is not the technical sophistication of the service provider but whether such technical capability is made available to the recipient. Applying this settled principle to the facts before me, we find that the grading and certification services rendered by GIA fail to satisfy the "make available" requirement embodied in Article 12(4) of the India-USA DTAA as well as the India-UK DTAA. 6.7. Accordingly, even assuming for the sake of argument that the consideration could be regarded as payment for technical services under the domestic law, the same would nevertheless fall outside the scope of "Fees for Included Services"/"Fees for Technical Services" under Article 12(4) of the applicable DTAAs. The receipts would therefore be taxable only as business profits and, admittedly, in the absence of a Permanent Establishment of the respective recipients in India, no part of such income can be brought to tax in India. Consequently, no obligation to deduct tax at source under section 195 of the Act arises in respect of such remittances. 6.8. An additional circumstance which fortifies the aforesaid conclusion is that the v....