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ACIT-16 (3) , Mumbai Versus M/s. D.A. Jhaveri

2016 (12) TMI 1478 - ITAT MUMBAI

TDS u/s 195 - Disallowance u/s 40(a)(i) - whether the payment made to HRD constitutes “fees for technical services” or not? - India-Belgium DTAA - Held that:- We affirm the conclusion of CIT(A) that the impugned payment cannot be characterised as “fees for technical services” having regard to the meaning and scope of the expression “fees for technical services” provided in the India-United Kingdom DTAA, which is amenable for application in the instant case having regard to MFN clause in the Indi .....

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Act. In the result, we hereby affirm the decision of CIT(A) on this aspect and Revenue fails. - 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 positi .....

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oresaid 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) - activity of cutting and polishing of diamonds - Held that:- The decision of the Tribunal in the case of Sheetal Diamonds Ltd. (2011 (3) TMI 1044 - ITAT, MUMBAI ) is quite eloquent where .....

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2016 - SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER For The Assessee : Shri Hiro Rai For The Revenue : Shri Morya Pratap ORDER PER G.S. PANNU, AM : The captioned appeal by the Revenue is directed against the order of CIT(A)-27, Mumbai dated 12.02.2013, pertaining to the Assessment Year 2008-09, which in turn has arisen from the order dated 20.12.2011 passed by the Assessing Officer, Mumbai under section 143(3) of the Income Tax Act, 1961 (in short the Act ). 2. In t .....

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ed of ₹ 18,26,347/-. 3. Whether on facts and circumstances of the case, the Ld. CIT(A) erred in not appreciating the fact that Hon'ble Supreme Court in the case of CIT Vs. Gem India Manufacturing Co. (2001) 249 ITR 307(SC) and Hon'ble High Court of Bombay in the case of London Star Diamond Co. (10 Ltd. 213 ITR 517 (Bom) had held that the diamond cutting and polishing amounts to processing of goods and not manufacturing of goods and decision relied upon in the case or M/s. Sheetal M .....

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e 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 .....

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oice in favour of the assessee with necessary particulars and the diamonds are shipped back to the assessee alongwith certification and other documents like invoice, airway bill, etc. The certified diamonds are released to assessee through Customs and a bill of entry. For such services, assessee had made payment of ₹ 22,95,152/- to HRD, for which no deduction of tax at source was required to be made. Firstly, as per the assessee, the goods are directly sent to HRD at Belgium and the said c .....

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see and, therefore, such services could not be regarded as fees paid for technical services . Under these circumstances, the case set-up by assessee was that there was no income liable to be taxed in the hands of HRD in India and accordingly, no tax was required to be deducted at source on the diamond gradation or certification charges paid to HRD. 6. On the contrary, the Assessing Officer noted that HRD was having a specialized knowledge in diamond grading and certification, which was technical .....

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Officer has also referred to Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and Belgium and noted that the definition of fees for technical services prescribed therein was on a similar footing to the definition of 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 .....

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e 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 relevant to the assessment year under consideration and, therefore, .....

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concluded that the impugned certification services of the diamonds sent by the assessee were entirely carried out outside India, i.e., in Belgium. Regarding the nature of services rendered by HRD, CIT(A) observed that no doubt the said concern was possessing expertise and technology to grade or certify the diamonds to determine their true features, and it was using such commercial or technical knowledge for grading the diamonds and giving a report thereon to its clients, which included the asse .....

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within the meaning of expression fees for technical services for the purposes of the Act as well as the India-Belgium DTAA. On this aspect, CIT(A) observed that the definition of the expression fees for technical services is similar under the Act as well as in the India- Belgium DTAA, so however, he referred to the Protocol Article of India- Belgium DTAA which prescribes that if under any convention and agreement between India and a third state, entered after 1.1.1990, India limits it taxation o .....

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rlier. 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 i .....

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CIT(A) concluded that the impugned payment made to HRD could not be termed as an income accruing to HRD by way of fees for technical services u/s 9(1)(vii) of the Act, and under these circumstances, considering that HRD does not have a PE in India, the impugned payments were not in the nature of business profits liable to be taxed in India in the hands of HRD. Therefore, it has been concluded that the impugned payment is not susceptible to deduction of tax at source u/s 195(1) of the Act and ac .....

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ssee has defended the order of CIT(A) and pointed out that the decision of CIT(A) is in line with the following decisions of the Tribunal wherein by virtue of the Most Favoured Nation (MFN) clause in the relevant Treaty, the expression fees for technical services has been understood with the requirement of making available of technology :- (i) DDIT v. Bajaj Allianz General Insurance Co. Ltd., 154 ITD 300 (Pune Trib) (ii) Sandvik AB v. DDIT, 167 TTJ 217 (Pune Trib) (iii) Sandvik AB v. DDIT, 70 SO .....

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ugned payment to HRD has been made towards grading and certification of diamonds. The question is as to whether the payment made to HRD constitutes fees for technical services or not ? For this purpose, the elaborate discussion by CIT(A) in his order reflects that so far as the definition of fees for technical services in the India-Belgium DTAA is concerned, it is an expanded definition if considered in the light of the definition prescribed in the India-United Kingdom DTAA. The scope of the exp .....

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tional 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 t .....

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l services contained in the subsequently entered India-United Kingdom DTAA. The phraseology of MFN clause in the India-Belgium DTAA, which has been reproduced by the CIT(A) in para 7.1 of his order, is itself quite clear and justifies the approach of CIT(A). Even otherwise, the decisions relied upon by the learned representative before us supports the said approach of CIT(A). As a consequence, we affirm the conclusion of CIT(A) that the impugned payment cannot be characterised as fees for techni .....

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nts are not liable to be taxed in India in the hands of HRD. Thus, there was no justification for the Assessing Officer to have invoked Sec. 40(a)(i) of the Act citing failure of the assessee to deduct tax at source u/s 195(1) of the Act. In the result, we hereby affirm the decision of CIT(A) on this aspect and Revenue fails. 13. Before parting, we may also refer to the alternative plea raised by assessee, which also supports the ultimate conclusion of CIT(A) that Sec. 40(a)(i) of the Act is not .....

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76. 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 .....

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uch 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. At the time of hearing, the learned representative for the assessee has relied on the following decisions in support of the aforesaid proposition:- 1. ACIT v. BSR & Co., ITA No. 1917/Mum/2013 2. Channel Guide India Ltd. v. ACIT, 139 ITD 49 (Mum-Trib) 3. New Bombay Park Hotel Pvt. Ltd. v. ITO(IT), 61 SOT 105 (Mum-Trib) 4. (UR .....

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see s claim for Additional depreciation @ 20% in terms of Sec. 32(1)(iia) of the Act amounting to ₹ 18,26,347/- on the new plant and machinery acquired and installed during the year under consideration. The Assessing Officer denied the claim of assessee for Additional depreciation solely on the ground that assessee s activity of cutting and polishing of diamonds does not amount to manufacture or production of goods in view of the judgment of Hon'ble Supreme Court in the case of Gem Ind .....

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rried out by the assessee, and further that the decision of the Hon'ble Supreme Court in the case of Gem India Manufacturing Co. (supra) was also considered. Therefore, the CIT(A) has held the assessee entitled to the claim of Additional depreciation u/s 32(1)(iia) of the Act on the ground that the activity of cutting and polishing of rough diamonds constituted manufacturing. Against such a decision of CIT(A), Revenue is in appeal before us. 16. Before us, the only plea of Revenue is that th .....

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en 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 5 .....

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sessing Officer has heavily relied on the judgment of the Hon'ble Supreme Court in the case of Gem India Manufacturing Co. (supra) to emphasise that cutting and polishing of uncut raw diamonds does not amount to manufacture or production of any article or thing. In this context, the following paragraph in the judgment of the Hon'ble Supreme Court is relevant:- There can be little difficulty in holding that the raw and uncut diamond is subjected to a process of cutting and polishing which .....

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ture or production because there was no material on record upon which such a conclusion can be reached . Evidently, the proposition canvassed by the assessee could not succeed before the Hon'ble Supreme Court because it was not able to demonstrate that the process undertaken of cutting and polishing uncut raw diamonds was producing a new article or thing. The aforesaid understanding of the judgment of the Hon'ble Supreme Court is fortified by the subsequent decision of Hon'ble Suprem .....

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, Turning, Profiling, Cutting, Drilling, 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 .....

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