Services Can’t Be Roped Into FTS Unless Person using Services Able To Use Technology: Gujarat High Court

The Gujarat High Court has held that mere rendering of services cannot be roped into fees for technical service (FTS) unless the person utilising the services is able to make use of the technical knowledge, etc.

The bench of Justice Biren Vaishnav and Justice Devan M. Desai has observed that services were rendered by GIA US, and by considering the make available clause as per the India-US DTAA, the simple rendering of services is not sufficient to qualify as FIS or FTS.

The respondent/assessee is a partnership firm and is in the business of cutting and polishing diamonds and exporting diamonds. On specific requirements by buyers, diamonds are sent for certification by the Gemmological Institute of America (GIA). The assessee entered into a customer service agreement with GIA Inc., USA.

The assessee committed an error in mentioning the name of the beneficiary while filling out an entry in Form 15CA/15CB. It is mentioned in the form that the remittance advice issued by the Bank of India is also in the name of GIA Hong Kong Laboratory Ltd.

The assessing officer held that the assessee has made payment to GIA Hong Kong Laboratory and not GIA USA and therefore cannot claim the treaty benefit between India and the USA, as well as between India and China. The assessee also ought to have deducted TDS before making payment to GIA Hong Kong, and having failed to do so, the assessee is in default. Therefore, they must pay Rs. 4.43 crore under Section 201(1) read with Section 201(1A) of the Income Tax Act.

The department contended that the self-declarations made in Form 15CA and the CA certificates furnished in Form 15CB clearly admitted that the beneficiary of the remittance has been specified as GIA Hong Kong Laboratory. Since the payments were made in Hong Kong dollars, it was clear that the services were rendered at the GIA Hong Kong Laboratory, and the payment-related details on the website demonstrated these facts about remittances to the Hong Kong Laboratory.

The assessee contended that the certification of diamonds is from GIA USA. A customer service agreement has been entered into, which clearly establishes that the agreement is with the GIA USA and not with the local laboratory. The certification is done by the US entity, and there is "no making available" of technical services, know-how, or knowledge exchange; therefore, the remittances are not qualified as "fees for technical services".

The court upheld the ITAT’s ruling, in which the facts have been thoroughly examined, and held that based on factual appreciation, especially the condition in the customer service agreement, the bank invoice, and the Bank remittance advice, a finding of fact has been arrived at that the assessee’s case was protected under the India-USA DTAA and that mere rendering of services cannot be roped into FTS unless the person utilising the services is able to make use of the technical knowledge, etc.

Case Title: Commissioner Of Income Tax (International Taxation And Transfer Pricing) Versus Star Rays

Case No.: R/Tax Appeal No. 77 Of 2023

Date: 31/07/2023

Counsel For Appellant: Varun K.Patel

Counsel For Respondent: B S Soparkar

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