TaxTMI 
TaxTMI 
2011 (3) TMI 1044
X X X X Extracts X X X X
X X X X Extracts X X X X
....It was stated that one Mr. Yadav was looking after the affairs of the Daman factory but, unfortunately, he had died in an accident but his native address was not provided. Some other questions were asked and he could not provide the details. In the background of this survey, a letter was issued to the assessee asking why claim for deduction under section 80-IA should not be denied. In response, a detailed reply along with various documents dated 9-3-2001 and 15-3-2001 were furnished which has been reproduced by the Assessing Officer in the assessment order. The Assessing Officer had dealt with the various documents as under: (a) In respect of points No. 1 to 7 of letter dated 9-3-2001 through which copy of the certification of incorporation of the company, copy of agreement for purchase of gala at Daman for factory premises, copy of bill for Rs. 1,24,500 for construction of additional loft at Daman factory, copy of SSI certificate, copy of factory licence, copy of certificate of Sales Tax registration at Daman and copy of letter to Sales Tax regarding Daman factory, copy of pollution control certificate, it has been stated by the Assessing Officer that department has n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Nos. STD bills - Daman to Bombay Office 38 It contains 4 Nos. STD bills - Daman to Bombay Office 39 Bombay Office telephone bill attached towards re-check the above STD phone no. 40 to 50 Few copies Daily production report of Daman factory - 97-98 51 to 54 Few copies of rough diamond Stock Register and out and polished diamond stock register 97-98 55 It contains 2 Nos. of maintenance Bill for the Month of November & December 97 (Daman Factory) 56 It contains (a) 1 No. maintenance bill for the month of January 98 (b) Railway ticket Surat to Bombay dtd.13-3-98 (c) 1 No. of Stationery bill - Purohit stationery Daman 57-58 Copy of staff welfare voucher attached with 3 bills (a) Hotel Miramar, Daman (b) Samrat Rest. Daman 59 Copy of expenses Voucher Rs.1122 60 Copy of Hotel Bill - Hotel Somnath Inn, Daman dt. 9-9-97 to 10-9-97 61 It contains (a) Hotel Bill - Hotel Miramar - dt. 10-9-97 (b) bill of Mahalaxmi Hindu Hotel dt. 9-9-97 62 It contains (a) 5 Nos. of STD bills - Daman to Bombay office for the month of Sept. 97 (b) Railway Ticket Mumbai to Vapid dt. 9-9-97 63 It contains 4 Nos. of Electricity Bills for the month of Oct. 97, Nov. '97, Dec.'97, March 98 64 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....letter written to the Electricity Department regarding non-functioning of the meter, he observed that no evidence was given as to when such defects were removed. In respect of letter written by Statistics Authority, NSSO (FOD), Government of India, Ministry of Planning, B 101, Vishnu Chambers, Valsad, he observed that there was no evidence to show that assessee ever filed any return. In respect of letter from Development Commissioner, SEEPZ, it was observed that no evidence was there as to how this letter was received. In respect of letter from the Asstt. Employment Officer, Daman asking assessee to furnish quarterly return in form ER-1, Assessing Officer observed that no evidence regarding filing of the return has been furnished. In respect of letter regarding new telephone, Assessing Officer observed that no evidence regarding allotment of new number has been given. In respect of photocopies of statement from Bank of India, he observed that it did not show the name address of the Branch and even address of the assessee was also not shown. 3. Similarly, Assessing Officer doubted all the documents filed before him on one pretext or the other and concluded that assessee had not don....
X X X X Extracts X X X X
X X X X Extracts X X X X
....survey took place on 24-3-1999 by which time the factory had already been closed and that is why the whole problem arose. Further, unfortunately, the person Shri Yadav who was looking after the operations of the Daman factory had died in an accident. He pointed out that it is wrong on the part of the Assessing Officer to say that the address of Shri Yadav was not provided because copy of his bio-data was submitted before him, copy of which is placed at page 81 of the paper book which clearly shows his address. He pointed out that the statement of Shri V.T. Shah, Managing Director, of the assessee company was recorded but since he was not looking after the operations he could not furnish some details at the time of survey. Since the factory had already been closed, therefore, there was no question of producing the workers. Most of the documents showing the activity of manufacturing have been rejected by the Assessing Officer by stating that they were either not produced at the time of survey or do not prove anything. He argued that during survey only those documents are generally produced which are demanded by the authorities and, therefore, there was no question of producing such d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ESI Corporation, will not take place without any manufacturing. All the documents considered together would clearly show that assessee had carried out manufacturing operations. 8. Coming to the second aspect whether cutting and polishing of diamonds would constitute manufacturing activity or not, he submitted that the decision of Hon'ble Supreme Court in the case of CIT v. Gem India Mfg. Co. [2001] 249 ITR 307/117 Taxman 368 was rendered in peculiar circumstances. He read out from the head note and pointed out that Hon'ble Supreme Court has clearly observed that polishing or cutting of diamonds cannot be called manufacturing activity in the absence of any material. He further read from last para at page 308 wherein it is clearly observed that there was no material on record from which it could be concluded by the Tribunal that such activity would constitute transfer. Thus, it is clear that this decision was rendered in the context where no material was produced before the Tribunal or lower authorities for coming to the conclusion that cutting and polishing of diamonds would constitute manufacturing activity. He vehemently argued that this decision is to be seen in the light of lat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....this Explanation has been inserted with effect from1-4-2004 but it has already been held to be of clarificatory nature and, thus, applicable to earlier years also by the decision of the Tribunal in the case of Bermecha's Impex (P.) Ltd. v. Dy. Dy.CIT [2006] 7 SOT 26 (Mum.). He then produced before us samples of rough diamonds which are loosely speaking are of uneven shape and dark brownish/bluish colour and like normal stones or glass. Then he explained various processes involved in cutting and polishing of diamonds by referring to the Commentary on Diamonds from Mines To Markets by Shri Kantilal Chhotala, relevant extracts of which have been filed in Volume III of the paper book at pages 314 to 324. He submitted that the first process involved is cleaving. He explained that cleaving is normally done to divide rough diamonds into two or more parts or to eliminate a defect however cleaving is not done if rough diamond is of regular shape. After this sawing is done and after this process the polishing becomes easy. Thereafter bruiting or girdling is done. Bruiting is a process by which the force and friction is applied so that the diamond is obtained in to required shape. After this ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Daman factory were very low, i.e., only at Rs. 15,778 in assessment year 1996-97, Rs. 17,405 in assessment year 1997-98 and Rs. 15,423 in assessment year 1998-99 respectively. He also pointed out that it was stated that the Managing Director Shri V.T. Shah that the factory operations were mainly controlled by one Shri Yadav who had died in an accident but his address was not provided. All these facts clearly show that no manufacturing operations were carried on by the assessee. 13. Coming to the second aspect, i.e., cutting and polishing of diamonds would constitute manufacturing or not, he also referred to Explanation 4 to section 10A and pointed out that Explanation 4 itself starts with expression "For the purpose of this section .........", which clearly means that this definition was only meant for the purpose of section 10A and could not be incorporated in section 80-IA. He then referred to the decision of the Hon'ble Supreme Court in the case of Gem India Mfg. Co. (supra) and invited our attention to the last para of the judgment at page 308 where the Hon'ble Apex Court has clearly observed that "There can be little difficulty in holding that the raw and uncut diamond is su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....early observe that "there is no material on record upon which such conclusion can be reached". Thus, it is clear that Hon'ble Court came to this conclusion because, according to the Court, the Tribunal did not have material. He also argued that there is no doubt that Explanation 4 to section 10A clearly states that that definition was for the purpose of that section, but at the same time it has to be remembered that there is no definition for manufacture in the Act or in section 80-IA and, therefore, when there was no definition available, this definition could be looked at. 15. We have considered the rival submissions carefully and find force in the submissions of the ld. Counsel of the assessee. A perusal of the assessment order clearly shows that the statement of the Managing Director Shri V.T. Shah was recorded much after the closure of the factory and, therefore, some of the information may not be available at that point of time, because in response to question No. 44 Shri Shah has clearly stated that from April, 1998 onwards Daman factory was not working regularly and the survey was conducted on 24-3-1999. From the details filed, it is clear that assessee has given proof for....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd depends, among other factors, on its make, that is, the quality of the finished product. A "good make" refers to a stone that is of fine proportions, symmetrical, and well polished. The purpose of cutting, faceting and polishing is to bring out the best in a diamond in terms of brilliance and purity, which results from the refraction and reflection of light. It is also necessary to preserve as much of the original weight as possible. Diamond has some special properties which are not common to other transparent minerals. These are a high refractive index, a high degree of clarity, colour dispersion, reflectivity and luster, and an extremely high degree of hardness. Luster is the characteristic of reflecting light from the surface. In the diamond, this is unique. Besides reflecting light from its surface, some of the light is partly absorbed before reflection. Most transparent minerals are not very reflective, but diamond is exceptional, its surface reflects 17 per cent of the light falling on it, in comparison to glass which reflects only 5 per cent. A diamond is cut and polished to give maximum brilliance which in turn depends on the light reflected back to the viewer [life]....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for the piece of diamond rough. The second is how quickly the finished diamond can be sold. Scanning devices are used to get 3-dimensional computer model of the rough stone. Also, inclusions are photographed and placed on the 3D model, which is then used to find an optimal way to cut the stone. Maximizing value The process of maximizing the value of finished diamonds, from a rough diamond into a polished gemstone, is both an art and a science. The choice of cut is influenced by many factors. Market factors include the exponential increase in value of diamonds as weight increases, referred to as weight retention, and the popularity of certain shapes amongst consumers. Physical factors include the original shape of the rough stone, and location of the inclusions and flaws to be eliminated. Weight retention The weight retention analysis studies the diamond rough to find the best combination of finished stones as it relates to per carat value. For instance, a 2.20 carat (440 mg) octahedron may produce (i) either two half carat (100 mg) diamonds whose combined value may be higher than that of (ii) a 0.80 carat (160 mg) diamond + 0.30 carat (60 mg) diamond that could be cut from the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is can also be known as girdling. Polishing Polishing is the name given to process whereby the facets are cut onto the diamond and final polishing is performed. The process takes the steps blocking, faceting, also called "brillianteering", and polishing. Final inspection The final stage involves thoroughly cleaning the diamond in acids, and examining the diamond to see whether it meets the quality standards of the manufacturer. Cutting process It is possible only because the hardness of diamond varies widely according to the direction in which one is trying to cut or grind. A simplified round brilliant cut process includes the following stages: l Sawing the rough stone. l Table setting where one facet is created. The table facet is then used to attach the stone into a dop (a lapidary tool holding gemstones for cutting or polishing). l Bruting the girdle. l Blocking four main pavilion facets. l Transferring to another dop in order to rotate the stone. l Blocking four main crown facets. l Cutting and polishing all pavilion facets. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ocess of manufacture something is produced and brought into existence which is different from the material out of which it is made and the product is by itself a commercial commodity capable of being sold or supplied - Material from which the thing or product is manufactured must necessarily lose its identity and must be transformed into a distinct product - It is only when the change takes a commodity to the point where commercially it can no longer be regarded as the original commodity but is recognised as a new and distinct article, manufacture can be said to have taken place." Thus, it is clear that when some process is operated on a material and then if a new product emerges, then such process has to be called 'manufacturing'. 18. Further, we find that Explanation 4 to section 10A reads as under: "Explanation 4 - For the purposes of this section, "manufacture or produce" shall include the cutting and polishing of precious and semi-precious stones." No doubt, as argued by the ld. DR the Explanation clearly starts with the expression "For the purposes of this section....." but at the same time, as pointed by the learned Counsel, no definition of the word 'manufacture' is ava....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he same thing as polished and cut diamonds, and that they were different entities in the commercial world. An ipse dixit of the Tribunal is not best foundation for a decision." On the above facts, it was held by the Apex Court as under: "There can be little difficulty in holding that the raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production. There is no material on record upon which such a conclusion can be reached." Thus, from the above, it is clear that the Hon'ble Supreme Court has held that cutting and polishing of uncut diamonds would not result in manufacture or production. But this conclusion seems to have been given on the basis that there was no material to hold otherwise. 20. In the case of Arihant Tiles & Marbles (P.) Ltd. (supra) again the Hon'ble Supreme Court observed whether manufacture/production of polished slabs and tiles would constitute manufacture for the purpose of section 80-IA. The head-note of the judgment reads as under: "The assessee, which was basically a factory owner and n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e in the category of "manufacture" or "production" under section 80-IA of the Income-tax Act. As stated hereinabove, the judgment of this court in Aman Marble Industries P. Ltd. [2003] 157 ELT 393 (SC) was not required to construe the word "production" in addition to the word "manufacture" . One has to examine the scheme of the Act also while deciding the question as to whether the activity constitutes manufacture or production. Therefore, looking to the nature of the activity stepwise, we are of the view that the subject activity certainly constitutes "manufacture or production" in terms of section 80-IA. In this connection, our view is also fortified by the following judgments of this court which have been fairly pointed out to us by learned counsel appearing for the Department. In the case of CIT v. Sesa Goa Ltd. [2004] 271 ITR 331 (SC), the meaning of the word "production" came up for consideration. The question which came before this court was whether the Income-tax Appellate Tribunal was justified in holding that the assessee was entitled to deduction under section 32A of the Income-tax Act, 1961, in respect of machinery used in mining activity ignoring the fact that the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed as the original commodity but is recognised in trade as a new and distinct commodity. The word "production", when used in juxtaposition with the word "manufacture", takes in bringing into existence new goods by a process which may or may not amount to manufacture. The word "production" takes in all the bye-products, intermediate products and residual products which emerge in the course of manufacture of goods. Applying the above tests laid down by this court in N. C. Budharaja's case [1993] 204 ITR 412 (SC) to the facts of the present cases, we are of the view that blocks converted into polished slabs and tiles after undergoing the process indicated above certainly results in emergence of a new and distinct commodity. The original block does not remain the marble block; it becomes a slab or tile. In the circumstances, not only is there manufacture but also an activity which is something beyond manufacture and which brings a new product into existence and, therefore, on the facts of these cases, we are of the view that the High Court was right in coming to the conclusion that the activity undertaken by the respondents-assessees did constitute manufacture or production in terms o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rther, the Legislature has used the words "manufacture" or "production". Therefore, the word "production" cannot derive its colour from the word "manufacture". Further, even according to the dictionary meaning of the word "production", the word "produce" is defined as something which is brought forth or yielded either naturally or as a result of effort and work (see Webster' s New International Dictionary). It is important to note that the word "new" is not used in the definition of the word "produce" Secondly, the judgment of the Bombay High Court in the case of Ship Scrap Traders [2001] 251 ITR 806 stands affirmed by the judgment of this court in the case of CIT v. Sesa Goa Ltd. [2004] 271 ITR 331. In that case, the question that arose before a Bench of three Judges of this court was as to whether extraction and processing of mineral ore amounts to production within the meaning of the word in section 32A(2)(b)(iii) of the 1961 Act. It was held that the word "production" is wider than the word "manufacture". It was held that the word "production" has a wider connotation than the word "manufacture". It was further held that the mined ore need not be a new product. In fact, the Dep....
X X X X Extracts X X X X
X X X X Extracts X X X X
....called thermo mechanical process which converts POY into texturised yarn, which, in turn, is used for the manufacture of fabric. One more point needs to be mentioned. Under the Income-tax Act, as amended in 2009, the test given by this court in Oracle Software's case [2010] (1) Scale 4251 has been recognised when the definition of the word "manufacture" is made explicit by the Finance (No. 2) Act, 2009, which states that "manufacture" shall, inter alia, mean a change in bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. Applying this definition to the facts of the present case, it may be mentioned that the above thermo mechanical process also brings about a structural change in the yarn itself, which is one of the important tests to be seen while judging whether the process is manufacture or not. The structure, the character, the use and the name of the product are indicia to be taken into account while deciding the question whether the process is a manufacture or not." Thus from the above decisions it is clear that processing or production of articles is also eligible for deduction under section 80....