TMI Blog2016 (12) TMI 1478X X X X Extracts X X X X X X X X Extracts X X X X ..... e amendment is determinative of the tax liability in the hands of a recipient of income, but so far as the present case is concerned, what is held against the assessee is the failure to deduct tax at source at the time of payment of such income. Ostensibly, de hors the aforesaid amendment, the impugned income was not subject to tax deduction in India as per the prevailing legal position when the payments were made. Thus, the taxability of a sum in the hands of the recipient on account of a subsequent retrospective amendment would not expose the payer of income to an impossible situation of requiring deduction of tax at source on the anterior date of payment of such income. Thus, on this count also, assessee cannot be held to be in default for not deducting tax at source so as to trigger the disallowance u/s 40(a)(i) of the Act. In the absence of any contrary decision, the aforesaid plea of assessee is also liable to be upheld and thus, the disallowance made by Assessing Officer by invoking Sec. 40(a)(i) of the Act stands correctly deleted by the CIT(A), which we hereby affirm.- Decided in favour of assessee. Claim for Additional depreciation @ 20% in terms of Sec. 32(1)(iia) - a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in seriatim. 4. Insofar as the Ground of appeal no. 1 is concerned, the same relates to an amount of ₹ 22,95,152/- representing payment to one M/s. HRD, Antwerp NV, Belgium (in short HRD ), which has been disallowed by the Assessing Officer by invoking Sec. 40(a)(i) of the Act on the ground that assessee failed to deduct tax at source on such payment. The CIT(A) has since set-aside the disallowance by holding that Sec. 40(a)(i) of the Act was inapplicable since assessee was not required to deduct tax at source on such payment. 5. The relevant facts are that the respondent-assessee is a partnership firm engaged in the business of import of rough diamond, cutting and polishing and sale thereof. HRD is a body corporate whose Registered office is located in Antwerp, Belgium. During the period under consideration, assessee paid ₹ 22,95,152/- to HRD towards grading and certification of diamonds. Assessee had explained before the lower authorities that it sends cut and polished diamonds to HRD s office at Belgium for necessary certification for which a separate series of invoice numbers are prepared in the name of HRD giving quantitative and qualitative details and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f fees for technical services provided in Explanation 2 to Sec. 9(1)(vii) of the Act. In nutshell, the Assessing Officer held that the impugned payment was made towards fees for technical services rendered by HRD, which was liable to be taxed in India in view of Sec. 9(1)(vii) of the Act and, therefore, assessee was liable to deduct tax at source on such payment u/s 195(1) of the Act. Having failed to do so, Assessing Officer invoked the provisions of Sec. 40(a)(i) of the Act and disallowed the expenditure of ₹ 22,92,152/-. 7. In appeal, assessee reiterated the submissions made before the Assessing Officer and pointed out that there was no requirement to deduct tax at source in India as said payment was not to be construed as income liable to be taxed in the hands of HRD in India. Before the CIT(A), assessee also made an alternative plea that Explanation to Sec. 9(1)(vii) of the Act, inserted by the Finance Act, 2010 retrospectively, prescribing that income is deemed to have been accrued in India to a recipient even in the case where services were rendered outside India under sub-section 2 to Sec. 9 of the Act was not available to the assessee during the previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply to the India-Belgium DTAA with effect from the date on which the present agreement with Belgium or the convention or agreement with third state is effected, whichever date is earlier. On the strength of the said Protocol, CIT(A) noted that the subsequent DTAA between India and United Kingdom prescribed that fees for technical services would be taxable in India only if technical knowledge, expertise, skill, knowhow or process, etc., which are the basis for the services rendered, are made available or parted with in favour of the client located in India along with the rendering of services. Considering the aforesaid meaning of the expression fees for technical services in the context of the instant fact-situation, CIT(A) noted that in providing grading or certification services of diamonds to the assessee, HRD has not parted with any technical knowledge or made available any technical expertise to the assessee so as to classify the impugned payment to HRD as fees for technical services . The CIT(A) has reproduced the relevant paras of India-United Kingdom DTAA and given his findings in the context of the Protocol clause in the India-Belgium DTAA. Therefore, the CIT(A) co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned, it is an expanded definition if considered in the light of the definition prescribed in the India-United Kingdom DTAA. The scope of the expression fees for technical services has been restrictively defined in the India-United Kingdom DTAA to mean that the technical knowledge, expertise, skill or know-how, etc., which are the basis for providing the services, ought to be transferred to or parted with in favour of the client so as to fall within the meaning of fees for technical services . Now, in the present case, CIT(A) has rightly relied upon the judgment of the Hon'ble Bombay High Court in the case of Diamond Services International Pvt. Ltd. (supra) to hold that the impugned payment is made to obtain gradation or certification of diamonds and is not meant for obtaining use of the technical knowhow, expertise or knowledge possessed by HRD to issue such gradation certificate. Therefore, in the absence of any making available of technical knowledge, expertise, skill or know-how by HRD to the assessee in the course of giving gradation certificate, such services cannot be characterised as fees for technical services in terms of the India-United Kingdom DTAA. The afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the Finance Act, 2010 with retrospective effect from 1.4.1976. According to the Revenue, inspite of the services having been rendered by HRD outside India, the same is deemed to be taxable in India in view of the aforesaid amendment and, therefore, according to the Revenue assessee was liable to deduct tax at source u/s 195(1) of the Act. 14. In our considered opinion, such retrospective amendment is determinative of the tax liability in the hands of a recipient of income, but so far as the present case is concerned, what is held against the assessee is the failure to deduct tax at source at the time of payment of such income. Ostensibly, de hors the aforesaid amendment, the impugned income was not subject to tax deduction in India as per the prevailing legal position when the payments were made. Thus, the taxability of a sum in the hands of the recipient on account of a subsequent retrospective amendment would not expose the payer of income to an impossible situation of requiring deduction of tax at source on the anterior date of payment of such income. Thus, on this count also, assessee cannot be held to be in default for not deducting tax at source so as to trigger the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer made no mistake by following the judgment of Hon'ble Supreme Court in the case of Gem India Manufacturing Co. (supra) to hold that the activity of cutting and polishing of rough diamonds did not amount to manufacture or production. 17. On the other hand, the learned representative for the assessee pointed out that the objection raised by Assessing Officer is based on the judgment of Hon'ble Supreme Court in the case of Gem India Manufacturing Co. (supra), which has been appropriately considered by the Mumbai Bench of the Tribunal in the case of Sheetal Diamonds Ltd. (supra), and it has been held that the activity of cutting and polishing of rough diamonds amounts to manufacture or production. In the course of hearing, reliance has also been placed on following decisions:- 1. Parmes Diamond Exports Pvt. Ltd. v. DCIT, ITA No. 1073- 1075/Mum/2009 2. Flawless Diamond (India) Ltd. v. Addl. CIT, 64 SOT 135 (Mum-Trib) 3. Barmecha s Impex (P) Ltd. v. DCIT, 105 TTJ 533 (Mum-Trib) 4. ITO v. Arihant Tiles and Marbles Pvt. Ltd., 320 ITR 79 (SC) 18. We have carefully considered the rival submissions. The short controversy before us is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Polishing, etc., by the use of sophisticated machineries resulting in production of a superior marketable commodity. Detailed procedure has been set out in the paper book. The Tribunal ought to have examined the process as to whether such process would constitute manufacture under Section 80IB of the Act. That exercise has not been undertaken. The reliance on the judgment of this Court in the case of Commissioner of Income Tax vs. Gem India Manufacturing Company, reported in [2001] 249 I.T.R. 307, may not be correct for the simple reason that, in that case, the Revenue succeeded as Gem India Manufacturing Company was not able to demonstrate the process undertaken by it to convert raw diamonds into a superior commodity. Moreover, the High Court has also not gone into that aspect. The High Court should have remitted the case to the Tribunal to consider whether the process undertaken by constituted manufacture . Under the above circumstances, the impugned orders of the High Court and the Tribunal are set aside and the matter is remitted to the Tribunal for de novo consideration in the light of what we have stated hereinabove. The civil appeal filed by the assessee is, accor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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