Diamond Grading Charges Paid to Foreign Agencies Cannot Be Treated as Fees for Technical Services: ITAT Mumbai

Case Overview

Case Name: ITO Vs Hari Krishna Exports Private Limited
Court: Income Tax Appellate Tribunal, Mumbai
Appeal Numbers: ITA 2360, 2362 & 2359/MUM/2026
Date of Order: 31/08/2026
Assessment Years: 2012-13, 2015-16, 2018-19, and 2019-20

Background and Context

Hari Krishna Exports Private Limited operates in the business of importing, manufacturing, trading, and exporting diamonds, along with the manufacture and export of jewellery. In the course of its operations across multiple assessment years, the assessee made payments to various non-resident entities located in different countries for obtaining diamond grading and certification reports. These payments were made without deduction of tax at source under Section 195 of the Income Tax Act, 1961.

The geographic spread of the recipient entities varied across the years under consideration:

  • AY 2012-13: Entities located in Hong Kong, South Africa, and Botswana
  • AY 2015-16: An entity situated in Thailand
  • AY 2018-19: Entities in USA, UK, Belgium, Hong Kong, Botswana, and South Africa
  • AY 2019-20: Entities in USA, UK, Belgium, Botswana, and South Africa

Despite the variation in jurisdictions, the fundamental nature of the service obtained — diamond grading and certification — remained identical across all four assessment years.

The Assessing Officer's Position

The Assessing Officer (AO) examined the payments and concluded that diamond grading and certification involved the application of specialised scientific knowledge, technically qualified personnel, and sophisticated equipment. On this basis, the AO characterised the payments as fees for technical services (FTS) chargeable to tax in India under the provisions of the Income Tax Act, 1961.

As a consequence of this classification:

  • The assessee was treated as an assessee in default under Section 201(1) of the Act for failure to deduct tax at source
  • Consequential interest was levied under Section 201(1A) of the Act

First Appellate Stage: CIT(A) Decision

The Commissioner of Income Tax (Appeals), after examining the nature of the grading activity and reviewing the material placed on record, took a different view from the AO. The CIT(A) held that the payments made for diamond grading and certification services did not constitute fees for technical services and were accordingly not chargeable to tax in India. The demands raised under Section 201(1) and interest levied under Section 201(1A) were accordingly deleted.

Aggrieved by this relief granted to the assessee, the Revenue filed appeals before the ITAT for all four assessment years.

Note on Delay: The Tribunal observed that there was a delay of 27 days in filing the Revenue's appeals for AYs 2012-13 and 2015-16. No separate condonation applications were filed; however, the Tribunal, in the interest of substantial justice and upon finding that the delay was neither intentional nor deliberate, condoned the delay and admitted the appeals for adjudication on merits.

What the Grading Agencies Actually Did

The foreign grading agencies received diamonds submitted by the assessee, physically examined them using their laboratory facilities and instrumentation, and thereafter issued independent grading reports. These reports described the physical characteristics of each diamond, including:

  • Cut
  • Colour
  • Clarity
  • Carat weight

The key distinction emphasised by the assessee before the Tribunal was that: