How A Clerical Error Led To Substantial Tax Litigation.

The Gujarat High Court (the “HC”), in a recent ruling (the “HC Ruling”), dismissed the Indian tax department's (the “ITD”) appeal against a Tribunal Ruling allowing the taxpayer to rely on a beneficial double taxation avoidance agreement provision previously denied by the ITD due to a mere clerical error in Forms 15CA and 15CB.

Background

Star Rays, an Indian partnership firm engaged in the diamonds business, (the “Taxpayer”) had a customer services agreement with the Gemmological Institute of America (“GIA US”) for testing and certification of diamonds. GIA US had a laboratory in Hong Kong named GIA Hong Kong Laboratory Limited (“GIA HK”). 

The Taxpayer sent certain diamonds to Hong Kong for certification by GIA US and made payments for services to GIA US' offshore bank account in Hong Kong. The Taxpayer did not withhold tax on the payments because of the services not being taxable under Article 12 of the Double Taxation Avoidance Agreement between India