ITO IT 222, MUMBAI vs. HARI KRISHNA EXPORTS PRIVATE LIMITED, MUMBAI

आयकर अपील�य अ�धकरण, मुंबई पीठ�, मुंबई INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI BENCH: I BEFORE SMT. BEENA PILLAI, HON’BLE JUDICIAL MEMBER AND SHRI ARUN KHODPIA, HON’BLE ACCOUNTANT MEMBER

ITA 2474 & 2412/MUM/2026 िनधा�रण वष�/Assessment Year: 2013-14 & 2014-15) ITO IT 222 HARI KRISHNA EXPORTS PRIVATE 630-B, KAUTILYA BHAWAN, LIMITED BKC , MUMBAI, MUMBAI- 400051, MAHARASHTRA 630-B, KAUTILYA Vs. BHAWAN, BKC , MUMBAI MUMBAI-400051, MAHARASHTRA अपीलाथ� Appellant ��थ� Respondent

Permanent Account Number of AACCH8430N Assessee:

अपीलाथ� �ारा/Department Shri Nitesh Joshi & Ashwin Kashinath, AR represented by: ��थ� �ारा/assessee represented by: Shri Dharamveer D. Yadav - Sr. DR

सुनवाई की तारीख / Date of conclusion of hearing: 22-Jul-2026 घोषणा की तारीख / Date of pronouncement: 30/07/2026 आदेश / ORDER PER BENCH:

Present appeals have been filed by the Revenue against the separate orders passed by the Ld. CIT(A)-56, Mumbai, [hereinafter referred to as “Ld.CIT(A)”] both dated 29/11/2025, for Assessment Years 2013-14 and 2014-15.

2.1. The grounds of appeal raised by the Revenue in both the assessment years are mutatis mutandis identical, except for the variation in the quantum involved. Therefore, grounds of appeal for Assessment Year 2013-14 are reproduced herein below for the sake of ready reference:

“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:-

3.1. Subsequently, enquiries conducted u/s 133(6) for the year under consideration, and it revealed that during the relevant previous year the assessee remitted to GIA Laboratory, Hong Kong and GIA Laboratory, Thailand towards grading charges. It was noted that tax was deducted on a part of the remittance made to GIA Laboratory, Thailand, and no tax was deducted on the payments made to GIA Laboratory, Hong Kong and on the balance amount remitted to GIA Laboratory, Thailand.

3.2. The Ld.AO held that, the payments constituted fees for technical services 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.

Aggrieved by the said order, the assessee preferred an appeal before the Ld. CIT(A).

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.

5.1. The Ld.AR submitted that the diamonds are sent outside India for certification and the entire grading activity is carried out abroad. GIA merely examines the diamonds and issues certificates. He submitted that in this process, it neither renders any technical service to the assessee nor transfers any industrial, commercial or scientific knowledge or experience. The issuance of a grading certificate is only an assertion of facts relating to the diamond and cannot be equated with rendering of technical services within the meaning of section 9(1)(vii) of the Act.

5.2. The Ld.AR contended that obtaining a grading report is a post- manufacturing activity undertaken solely to provide confidence to customers regarding the quality of the diamonds. The grading report does not assist the assessee in manufacturing or improving the diamonds, nor does it enable the assessee to rectify or enhance the characteristics of the product. He submitted that the report is comparable to a product brochure or a BIS hallmark for gold jewellery, that merely assures the customer regarding quality without conferring any commercial or technical benefit upon the manufacturer.

5.3. The Ld.AR submitted that the assessee itself possessed the technical expertise to grade diamonds and the grading by GIA merely provides an independent third-party confirmation. Similar grading services are also offered by several other internationally recognised agencies. Consequently, GIA did not provide any value- added technical service to the assessee. Referring to Explanation 2 to section 9(1)(vii), it was submitted that although "fee for technical services" include managerial, technical or consultancy services, the expression "technical services" has not been defined under the Act and has to be interpreted in the light of judicial precedents. The Ld.AR submitted that mere employment of technically qualified personnel by the service provider does not convert every service into a technical service. He also submitted that unless technical knowledge or skill is made available to the recipient, the payment cannot be characterised as fees for technical services.

5.4. The Ld.AR further submitted that the Ld.AO erred in relying on the fact that GIA employed technically qualified personnel possessing specialised expertise. It is submitted that in fact, the technical knowledge remained entirely with GIA and no technical know-how, methodology or expertise was imparted to the appellant for its future use. It was also contended that 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 Tribunal in case of TUV Bayren (India) Ltd. v. DCIT reported in 23 taxmann.com 127, affirmed by the Hon'ble Bombay High Court, wherein certification services were held not to constitute fees for technical services.

5.6. It was further submitted that GIA had no permanent establishment or business connection in India and, therefore, the payments constituted only business profits not chargeable to tax in India in the absence of a permanent establishment. The Ld.AR further pointed out that the revenue, in other cases involving identical diamond grading services, issued certificates authorising remittance without deduction of tax at source, and therefore adoption of a contrary stand in the present case was unjustified.

5.7. It was further submitted by the Ld.AR that the Ld.AO examined the issue with reference to the DTAAs with Hong Kong and Thailand, whereas the applicable treaty was the India-USA DTAA. Under the agreement dated 12.12.2012, the appellant had contracted directly with GIA, USA. The laboratories situated in Hong Kong and Thailand merely functioned as laboratories of GIA, USA, and the invoices as well as grading certificates were issued by GIA, USA. Accordingly, the beneficial owner of the remittances was GIA, USA.

5.8. The Ld. AR thus submitted that GIA, USA is a tax resident of the United States and admittedly has no permanent establishment in India. Consequently, the taxability of the payments had to be examined under Article 12 of the India-USA DTAA dealing with "fees for included services". Referring to Article 12(4) of the India- USA DTAA, the Ld. AR argued that the grading services neither were ancillary to any royalty payment nor satisfied the "make available" condition, as no technical knowledge, experience, skill, know-how or process was imparted to the appellant enabling it to perform the grading independently in future. GIA merely issued a grading report and did not transfer any technical capability to the assessee.

5.9. Reliance was placed on the decision of the Hon’ble Surat Bench of the Tribunal in case of ITO v. Star Rays reported in 139 taxmann.com 437, wherein payments made to GIA for diamond grading reports were held not to constitute fees for technical services since no technical knowledge or skill was made available to the payer.

5.10. The Ld.AR thus contended that the payments made by the assessee constituted business 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 consideration paid by the assessee was, therefore, for availing technical services rendered by GIA.

5.13. The Ld.DR contended that Explanation 2 to section 9(1)(vii) defines "fees for technical services" to include consideration for rendering technical services, including services provided through technical or other personnel. The provision does not stipulate that technical knowledge should be transferred or made available to the recipient. Therefore, once technical services are rendered by technically qualified personnel for consideration, the payment squarely falls within the ambit of fees for technical services under the domestic law.

5.14. The Ld.DR further submitted that the assessee derived substantial commercial benefit from obtaining the grading certificates. The certificates enhanced the credibility, marketability and acceptability of the diamonds in the international market and enabled the assessee to sell certified diamonds with greater customer confidence. The grading reports thus constituted an integral part of the assessee's business operations and could not be equated with an ordinary brochure or product description, as sought to be contended by the assessee.

5.15. It was argued that the fact that the grading process was carried out outside India or that the assessee already possessed expertise in grading diamonds was of no consequence. The relevant consideration was that the assessee deliberately engaged GIA because of its internationally recognised technical expertise and independent certification standards. The payment was made precisely because of GIA's specialised technical capabilities and industry experience.

5.16. The Ld.DR also relied upon the judicial precedents referred to by the Ld.AO, including Intertek Testing Services, G.V.K. Industries, Continental Construction, CBDT v. Oberoi Hotels and Dean, Goa Medical College, to contend that technical services encompass services rendered by persons possessing specialised technical knowledge and expertise, even where there is no transfer of technology or technical know-how to the recipient.

5.16. The Ld.DR submitted that the Ld.AO had correctly examined the taxability of the payments in light of the facts available on record and that the assessee had failed to establish that the payments were exclusively governed by the India-USA DTAA. In any event, the nature of services rendered 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.

(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 and Thailand entity. From the record placed before us, it is noted that during the year under consideration the assessee made payment towards grading and certification services to following parties:

S. No. Name of the Party Address Amount (Rs.)

1 GIA Education Laboratory Botswana 4,37,066/-

Gemological Research 2 Thailand 68,73,128/- (Thailand) Co. Ltd.

3 GIA (Israel) Israel 2,57,288/-

4 GIA Laboratory, Thailand Thailand 22,78,366/-

Total 3,03,51,151/-

6.1. From the material placed on record prima facie indicates that GIA 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). The report merely certifies the characteristics of the diamond as found upon examination. There is nothing on record to suggest that GIA imparts its grading methodology, scientific process, technical standards or specialized know-how to the assessee. Thus the assessee does not acquire the capability of undertaking GIA certification independently merely because it receives a grading report. For every subsequent certification, the assessee would necessarily have to approach GIA afresh. Thus, the service culminates in the issuance of an independent certification and not in the transfer of any technical knowledge or skill.

6.2. We find that the consideration paid by the assessee does not fall within the ambit of "fees for technical services" as defined in Explanation 2 to section 9(1)(vii) of the Act. The said Explanation contemplates consideration for rendering managerial, technical or consultancy services. The expression "technical services", though not defined in the Act, has to be understood in the context in which it is employed. Merely because the service provider utilizes specialized knowledge, scientific equipment or technically qualified personnel while rendering a service would not, by itself, lead to the conclusion that every payment made for such service constitutes fees for technical services. The true test is the nature of the service rendered to the recipient. In the present case, GIA merely examines the diamonds forwarded by the assessee and issues an independent grading report certifying their physical characteristics, such as cut, colour, clarity and carat(weight). 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 technical skill, knowledge or industrial or commercial experience to the customer. Similar principles have been recognized in the decisions relied upon by the assessee, wherein certification service has been distinguished from technical services involving transfer of know-how.

6.4. Having held that the impugned payment does not constitute "fees for technical services" within the meaning of Explanation 2 to section 9(1)(vii) of the Act, we also examine the alternative contention of the assessee under the applicable Double Taxation Avoidance Agreements in respect of the payments made to the entities situated in the USA and the United Kingdom. It is an undisputed position that Article 12(4) of both the India-USA DTAA and the India-UK DTAA adopts a narrower definition by bringing within its fold only those technical or consultancy services which, inter alia, "make available" technical knowledge, experience, skill, know-how or processes to the recipient. Thus, the treaty imposes an additional condition over and above the provisions of the domestic law, namely, that the recipient of the service must be enabled to apply the technical knowledge or skill independently in future without recourse to the service provider.

6.5. In the facts of the present case, the grading and certification services rendered by GIA merely culminate in the issuance of a grading report describing the physical characteristics of the diamonds submitted by the assessee. The report neither imparts any technical methodology nor transfers the grading process, scientific standards, know-how or specialised expertise employed by GIA in undertaking such examination. The assessee does not acquire the capability to undertake grading or certification independently merely because it receives the grading report. On the contrary, for every subsequent grading or certification, the assessee would necessarily have to approach GIA afresh. Thus, the services rendered by GIA do not result in the transmission of any enduring technical knowledge or skill to the assessee.

6.6. The expression "make available" has consistently been interpreted by the Courts to mean that the technical knowledge or skill should be imparted in such a manner that the recipient is equipped to utilise the same independently thereafter. The mere use of specialised knowledge or technical expertise by the service provider in rendering the service 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 very receipts arising from diamond grading and certification services have been held to be not chargeable to tax in India in the hands of the non-resident recipient itself. Co- ordinate Bench of this Tribunal, in ITA Nos. 2309/Mum/2017; ITA No. 1136/Mum/2015; ITA No. 851/Mum/2016; ITA No. 2295/Mum/2017; ITA No. 7040/Mum/2017; ITA No. 6380/Mum/2018; ITA No. 7741/Mum/2019, vide order dated 03/05/2021, after examining the nature of the activities carried on by GIA, USA, held that the said entity did not have a Permanent Establishment in India and, consequently, its receipts were not chargeable to tax in India as business profits. Though the issue before the Co-ordinate Bench arose in the assessment of the recipient, the said finding has a direct bearing on the present controversy. Hon'ble Supreme Court in case of GE India Technology Centre (P.) Ltd. v. CIT reported in (2010) 327 ITR 456 authoritatively held that the obligation to deduct tax at source under section 195 arises only when the sum payable to the non-resident is chargeable to tax under the provisions of the Act. Therefore, once it is found that the impugned receipts are not chargeable to tax in the hands of GIA, USA, the very foundation for invoking section 195 disappears.

6.9. In so far as the payments made to the entities situated in Thailand and Hong Kong are concerned, we find that the revenue has sought to tax the impugned remittances solely on the footing that they constitute "fees for technical services" within the meaning of section 9(1)(vii) of the Act. Having already held hereinabove that the activity of grading and certification of diamonds does not amount to rendering of managerial, technical or consultancy services and, consequently, the consideration paid therefor does not fall within the ambit of "fees for technical services" as defined in Explanation 2 to section 9(1)(vii), the identity or location of the non-resident recipient does not alter the character of the payment. A payment which is not in the nature of fees for technical services under the Act cannot assume that character merely because it is received by a different non-resident entity. The Revenue has neither invoked nor established that the impugned receipts are otherwise chargeable to tax in India under any other provision of the Act, nor has any material been brought on record to demonstrate the existence of a business connection or any other taxable nexus in India in the hands of the respective recipients. Consequently, the payments made to the entities situated in Thailand and Hong Kong also cannot be regarded as sums chargeable to tax under the provisions of the Act.

6.10. We have also carefully perused the decisions in case of Intertek Testing Services(supra), G.V.K. Industries(supra), Continental Construction(supra) and Oberoi Hotels(supra) relied by the revenue. These decisions were rendered in the context of consultancy, technical advisory or professional services under different factual and statutory settings and therefore does not, advance revenues case. None of the aforesaid decisions deals with certification or grading services of this nature, they cannot be regarded as determinative of the issue arising in the present appeal. The controversy before us is materially different, namely, whether the activity of examining a diamond and issuing an independent grading certificate amounts to rendering of technical services to the payer. Their application, therefore, must necessarily be confined to the facts on which they were rendered.

6.11. We therefore do not find any infirmity in the view taken by the Ld.CIT(A) that the assessee cannot be treated as an assessee in default under section 201(1) of the Act nor can interest under section 201(1A) be levied in respect of the payments made for providing Grading and certification services.

Accordingly, the Grounds raised by the revenue for assessment year 2013-14 stands dismissed.

In the result, appeals filed by the revenue for assessment years 2013-14 and 2014-15 stands dismissed.

Order pronounced in the open court on 30/07/2026. Sd/- Sd/-

ARUN KHODPIA BEENA PILLAI ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai Dated: 30/07/2026 SC, Sr. P.S.

Copy to:

ITO IT 222, 630-B, KAUTILYA BHAWAN, BKC , 1 MUMBAI, MUMBAI-400051, MAHARASHTRA

HARI KRISHNA EXPORTS PRIVATE LIMITED, 2 630-B, KAUTILYA BHAWAN, BKC , MUMBAI, MUMBAI-400051, MAHARASHTRA

3 THE PCIT / CIT, 4 THE D.R., ITAT, MUMBAI BENCH 5 GUARD FILE