Diamond Grading Charges Cannot Be Treated as Fees for Technical Services: ITAT Mumbai Rules in Favour of Assessee

Background and Context

The Mumbai Bench of the Income Tax Appellate Tribunal recently delivered a significant ruling in ITO Vs Hari Krishna Exports Private Limited (ITAT Mumbai), dismissing the Revenue's appeals for Assessment Years 2013-14 and 2014-15. The central question before the Tribunal was whether payments remitted to foreign entities for diamond grading and certification services could be characterised as Fees for Technical Services (FTS) — and consequently whether the assessee was obligated to deduct tax at source under Section 195 of the Income-tax Act, 1961.

The outcome carries considerable practical significance for India's diamond and jewellery industry, where grading reports issued by internationally recognised bodies form an integral part of day-to-day trade operations.

Who Is the Assessee and What Triggered the Dispute?

Hari Krishna Exports Private Limited is engaged in the import, manufacture, trading and export of diamonds, as well as the manufacture and export of jewellery. In the course of its business, the assessee made payments to non-resident entities towards diamond grading and certification charges — a standard commercial requirement in the industry.

The dispute originated when the Revenue conducted a spot verification under Section 133A(2A) of the Income-tax Act, 1961 and detected that such remittances had been made to non-resident service providers without deduction of tax at source under Section 195. The Assessing Officer concluded that the payments represented Fees for Technical Services chargeable to tax in India, and accordingly treated the assessee as an assessee in default under Section 201(1), with consequential interest levied under Section 201(1A).

The Commissioner of Income Tax (Appeals) [CIT(A)], however, set aside the Assessing Officer's conclusions and deleted the demand, holding that diamond grading and certification services did not fall within the definition of FTS. The Revenue then preferred appeals before the Tribunal.

The Tribunal examined three distinct legal questions:

  1. Whether the payments made to foreign entities, including GIA, USA, constituted Fees for Technical Services under Section 9(1)(vii) of the Income-tax Act, 1961.
  2. Whether the payments satisfied the more restrictive "make available" test prescribed under Article 12(4) of the India-USA Double Taxation Avoidance Agreement (DTAA).
  3. Who the actual beneficial recipients were in respect of payments directed to entities located in Thailand and Hong Kong, and whether those payments were chargeable to tax in India on any footing.

The Nature of Diamond Grading Services

What Does a Grading Entity Actually Do?

The Tribunal closely analysed the factual matrix surrounding the grading process. GIA examined diamonds submitted by the assessee and issued independent grading reports describing physical characteristics — cut, colour, clarity and carat weight. These reports represent an objective, third-party certification of an existing physical commodity.