Diamond Testing & Certification Services by GIA USA Covered Under India-USA DTAA: Gujarat HC Dismisses Appeal by Income Tax Department [Read Order]

The High Court of Gujarat has held that diamond testing & certification services provided by the Gemological Institute of America (GIA) USA is covered Under India-USA Double Taxation Avoidance Agreement (DTAA).

The court dismissed the appeal filed by the Revenue, Commissioner of Income Tax (International Taxation and Transfer Pricing), finding no substantial question of law warranting further consideration.

The case revolved around the application of the India-USA DTAA concerning the taxation of income from diamond testing and certification services.

The appellant revenue, represented by Mr. Varun K. Patel challenged the orders passed by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT), Surat pertaining to the Assessment Year (AY) 2015-2016.

The main issue centered on whether the benefits of the India-USA DTAA should be extended to the payments made by the respondent, Star Rays, a diamond business entity, to GIA USA for diamond testing and certification services.

The revenue contended that these payments were inappropriately routed through GIA USA to avail of the treaty benefits, as the services were rendered by GIA Hong Kong Laboratory Ltd., an independent corporate entity situated in Hong Kong.

The revenue raised several substantial questions of law in their appeal, including the nature of services, the applicability of DTAA, the role of GIA Hong Kong Laboratory and the correctness of the forms filled by the respondent assessee while remitting payments.

The respondent, represented by Mr. B S Soparkar contended that the payments were indeed made to GIA USA’s offshore bank account and that the error in the forms was purely clerical.

The respondent also emphasised that the diamond certification services were rendered by GIA USA, which holds the intellectual property rights for the certificates.

Furthermore, they also highlighted that the service agreement was directly with GIA USA and not its local laboratory in Hong Kong.

The court observed that the customer service agreement between Star Rays and GIA USA indicated that the agreement was with GIA USA and invoices were issued by GIA USA.

The court also highlighted that there was an error in mentioning the beneficiary’s name while filling out the relevant forms, leading to confusion about the remittance.

The bench emphasised that the services rendered were based on a professional team’s knowledge and expertise in grading and certifying diamonds, which did not involve the imparting of technical knowledge.

The bench also noted that as per the terms of the agreement, the services provided by GIA USA were not “make available” services, and therefore, the payments could not be considered as fees for technical services (FTS) under the India-USA DTAA.

The bench also acknowledged that the respondent had furnished a Tax Residency Certificate (TRC) from the US tax authority and Form No. 10F, which established their eligibility for DTAA benefits.

The court, after considering the evidence including the bank invoices and remittance advice, concluded that the payments were indeed made to the account of GIA USA, reinforcing the respondent’s eligibility for the treaty benefits.

The division bench comprising Justice Biren Vaishnav and Justice Devan M. Desai observed that the appeal raised no substantial questions of law and the Commissioner’s orders were based on factual appreciation.

The Court reiterated that a substantial question of law must involve matters of general public importance or directly affect the parties’ rights and it must be a debatable issue. In this case, the Court found that the dispute was primarily about the correct interpretation of facts rather than a substantial question of law.

The court highlighted that the services provided by GIA USA were not “make available” services and that the payments were routed through GIA USA’s accounts, entitling the respondent assessee to the benefits of the India-USA DTAA.

In result, the Gujarat High Court ruled in favour of the respondent assessee, maintaining that the payments for diamond certification services provided by GIA USA were eligible for DTAA benefits between India and the United States. The Court upheld the factual findings and dismissed the Revenue’s appeal.

To Read the full text of the Order CLICK HERE

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