TaxTMI 
TaxTMI 
TaxTMI 
2014 (9) TMI 261
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....appear in the appeal in ITA no. 2886/Mum./2012, for A.Y. 2008-09. 2. The assessee, for the A.Y. 2008-09, by way of various grounds of appeal, has challenged the disallowance of claim of deduction u/s 80IC of Rs. 18,41,14,136, as against the claim of Rs. 19,27,51,144, mainly on the ground that cutting and polishing of the diamonds do not amount to manufacturing or production of "article" or "thing". 3. The assessee company is engaged in the business of cutting and polishing of diamond and trading in jewellery and polished diamonds for which it has set-up its unit at Selaqui, District Dehradoon. From this unit, the assessee has been carrying out the activity of cutting and polishing of diamonds manufacturing of jewellery. The profits derived from such units have been claimed as deduction under section 80IC to the tune of Rs. 19,27,51,144, being 100% of the profit. The Assessing Officer required the assessee to substantiate the claim of deduction made under section 80IC, specifically in view of the decision of the Hon'ble Supreme Court in Gem India Mfg. Co., [2001] 249 ITR 307 (SC). In response, the assessee, vide letter dated 28th December 2010, submitted that the decision of t....
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.... of doilars in some cases. In addition, if one attempts to cleave a diamond in the wrong position, the diamond could shatter and become worthless. Cleaving or sawing Once the planner decides where the diamond should be cut, the diamond is either manually cleaved or sawed. Sawing can be done with a diamond-coated rotary saw or a laser. Bruting Bruting forms the basic face-up outline of a round diamond to prepare it for faceting. During the bruting phase the diamond being bruted is spun on a rotating lathe while another diamond is forced against it, gradually forming the rounded outline. Essentially, one diamond is used to shape the other. Polishing Polishing is the final stage of the cutting process, giving the diamond its finished proportions. The first and perhaps most crucial polishing stage is blocking. This step lays the foundation for the potential of the diamond's performance because it establishes the diamond's bask symmetry, During the blocking stage, the first 17 or 18 facets are made, creating a sing cut. For some very small diamonds, the process stops here. Larger diamonds go on to the brillianteering stage. In this process a specialist called a brilliantee....
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....165,70,49,443 Profit (B) Rs. 19,27,51,144 Sale of jewellery (C) Rs. 7,42,50,925 Deduction allowable u/s 80IC (B) x (C) A Rs. 86,37,008 5. The assessee, before the learned Commissioner (Appeals), reiterated that the diamond cutting and polishing involved a very lengthy process and requires special skills to convert rough diamond into polished diamond and both are different products recognised in the market. The implication of the judgment of Gem India Mfg. Co. (supra) was also explained and was distinguished from the facts of the assessee's case. The assessee also filed photographs of the various machinery used and the tools utilised along with the process of converting the rough diamond into polished diamond. The assessee also placed reliance upon the decision of the Hon'ble Supreme Court in Arihant Tiles and Marbles (supra). Since the additional evidence was filed in the form of list of machinery, photographs of machinery, describing the entire process, the learned Commissioner (Appeals) called for the remand report from the Assessing Officer. The Assessing Officer, in the remand report dated 13th January 2012, by and large, reiterated the ob....
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....nt year, the same very claim for deduction cannot be disallowed on the ground that in this year cutting and polishing of the diamond do not amount to manufacturing. In support of his contention that if the claim for deduction in Chapter VIA, has been allowed in the earlier year on similar facts and circumstances, then the same should be allowed in the subsequent years also. He mainly relied upon the following decisions. i) CIT v/s Paul Brothers, [1995] 216 ITR 548 (Bom.); ii) CIT v/s Feteh Granite Pvt. Ltd., [2009] 314 ITR 32 (Bom.); iii) CIT v/s A.R.J. Security Printers, [2003] 264 ITR 276 (Del.). 8. On merits, he submitted that before the Assessing Officer as well as before the learned Commissioner (Appeals), the entire process through which rough diamond is converted into polished diamond has been explained in detail and there is no rebuttal or counter opinion by the Department. Both the authorities have heavily relied upon the decision of the Hon'ble Supreme Court in Gem India Mfg. Co. (supra) which cannot be held to be applicable in assessee's case. In that case, the Hon'ble Supreme Court categorically held that there was no material available on record to establis....
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....supra) cannot be applied in all the cases. The process of conversion of raw diamond into a polished diamond has to be examined in a given case and here the assessee has submitted a detail process as to how a rough diamond has been converted into polished diamond which involves various stages through which cutting and polishing of diamond is undertaken for making altogether different product. The case of the assessee is thus, purely distinguishable from the decision of Gem India Mfg. Co. (supra) inasmuch as the assessee has fully demonstrated the entire process of manufacturing. He further submitted that the definition of manufacture as brought in the statute w.e.f. 1st April 2009 in section 2(29BA) will also go to assist the assessee's case even though the said provision is applicable from the assessment year 2009-10 inasmuch as the process of cutting and polishing of diamond brings into existence all together a new and distinct commodity having different character and use. Thus, the assessee's claim of deduction under section 80IC cannot be denied in this case. Lastly, he submitted that provisions of section 80IC provides that the deduction is allowed on the profits derived by und....
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....ies which can be considered to be manufacturing or production of article or thing or not, has been the subject matter of the judicial scrutiny and analysis in several cases. In majority of the judicial pronouncements, the emphasis on the term "manufacture" has been understood as the end result of one or more process through which the original commodity changes or converts into a distinct article having different name, characteristic, use, etc. The Hon'ble Supreme Court has always opined to examine the process involved for manufacturing of a product in question. In case of Aspin Wall & Co. Ltd. v/s CIT, [2001] 251 ITR 323 (SC), the Apex Court held that in the absence of a definition of the word "manufacture" it has to be given a meaning as it is understood in common parlance. It is to be understood as meaning, the production of article for use from raw material or prepared materials by giving such materials new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different articles, then it would amount to manufacturing activities. The Supreme Court also quoted the observations made in Dy. CST v/s PIO Foood P....
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....ct entity, which is polished diamond. The conversion of a rough raw diamond as explained by the assessee, involves different processing and several stages to become into a polished diamond, which is entirely a different product, and is mainly used in manufacturing of jewellery and also as an independent item of sale, whereas the raw diamond has only industrial usage. The market value of a rough diamond and polished diamond is also at great variance, as polished diamond is far more expensive than, the rough diamond. Looking from the angle of usage, shape, size and colour, the rough diamond converts into entirely a different and distinct product all together which has a different character and usage. The Tribunal in Sheetal Diamonds Ltd. (supra) has discussed the various stages and process involved for cutting and polishing of diamond in detail which for the sake of understanding the entire process and the different attributes of the rough and polished diamond is reproduced herein below:- "16. As far as the issue whether cutting and polishing of diamonds would constitute manufacturing or not, before us Ld. Counsel of the assessee had produced rough diamonds which are just like ordin....
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....g, dividing a crystal by a diamond saw; Bruting or Girdling, removing a portion of the crystal by rubbing or grinding it with another diamond, as for instance, the girdle of a brilliant; Grinding and polishing, making a flat surface or facet on a rotating wheel or lap coated with diamond powder; Polishing, preparing the finely ground or facet, by a method similar to grinding." 17. We also used Inter Net to find out scientific information on the process involved in making out find diamond. We could get Wikepedia encyclopedia on 'Net' in which various stages involved in making of a 'diamond' are described. The process of cutting and polishing of diamonds as described in the Wikepedia encyclopedia is as under: Diamond cutting is the art, skill and, increasingly, science of changing a diamond from a rough stone into afaceted gem. Cutting diamond requires specialized knowledge, tools, equipment, and techniques because of its extreme hardness. The first guild of diamond cutters and polishers (diamantaire) was formed in 1375 in Nuremberg, Germany, and led to the development of various types of 'Cut'. This has two meanings in relation to diamonds. The first is th....
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....t (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 same rough diamond. The round brilliant cut and square brilliant cuts are preferred when the crystal is an octahedron, as often two stones may be cut from one such crystal. Oddly shaped crystals, such as macles are more likely to be cut in a fancy cut-that is, a cut other than the round brilliant-which the particular crystal shape lends itself to. Even with modern techniques, the cutting and polishing of a diamond crystal always results in a dramatic loss of weight, about 50%. Sometimes the cutters compromise and accept lesser proportions and symmetry in order to avoid inclusions or to preserve the weight. Since the per-carat price of a diamond shifts around key milestones (such as 1.00 carat), many one-carat (200 mg) diamonds are the result of compromising Cut quality for Carat weight. Some jewelry experts advise consumers to buy a 0.99 carat (198 mg) diamond for its better price or buy a 1.10 carat (220 mg) diamond for its better cut, avoiding a 1.00 carat (200 mg) ....
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....own facets. * Cutting and polishing all pavilion facets. * Transferring to another dop. * Cutting and polishing all crown facets This is just one, although a fairly common way of creating a round brilliant cut. The actual process also includes many more stages depending on the size and quality of the rough stone. For example, bigger stones are first scanned to get the three-dimensional shape, which is then used to find the optimal usage. The scanning may be repeated after each stage and bruting may be done in several steps, each bringing the girdle closer to the final shape. The various processes like cleaving and splitting, bruting and girdling of diamond and polishing and cutting have been discussed in further detail in the book, but we feel there is no need to highlight the technical aspects. Sufficient it to say that rough diamonds looks like a stones (or glass) of uneven shape which, as mentioned earlier, were looking highly coloured, particularly like brownish/greenish/bluish colours, whereas the final product of diamond is a much smaller piece and generally sparkling white in colour. It was explained to us that size of the final product i.e. 'polished diamond' d....
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....vered by its decision in the case of CIT vs. London Star Diamond Co. (I) Ltd. (supra). It was not pointed out to the High Court that the question in that case was whether the assessee was an industrial company within the meaning of s. 2(8) of the Finance Act, 1975, and that, in answering that question, the High Court had held that raw diamonds and cut and polished diamonds were different and distinct marketable commodities having different uses; therefore, a company engaged in cutting and polishing raw diamonds for the purpose of export was engaged in the "processing of goods" to convert them into marketable form. The question that the High Court and we are here concerned with is whether, in cutting and polishing diamonds, the assessee manufactures or produces articles or things. 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 raw article or thing which is the result of manufacture or production. There is no material on the record upon which such a conclusion can be reached." 15. Later on, the Supreme Court in the judg....
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....unter opinion have been sought to contradict the assessee's version of the process. Thus, in our opinion, once the entire process of cutting and polishing of diamond have not been rebutted and also the fact that the rough and polished diamond are two distinct commodity having different usage, not only in the common parlance but also in real sense, then it has to be understood that the cutting and polishing of diamond amounts to manufacturing or production of article or thing as envisaged for the purpose of claiming deduction under section 80IC. Thus, the contention raised by the learned counsel before us is accepted that simply relying on the decision of Gem India Mfg. Co. (supra) by the Revenue to deny the claim of deduction is uncalled for in the present case, especially in the wake of later decision of the Hon'ble Supreme Court in Heavens Diamond (supra) which has clarified this point. Accordingly, the decision and the conclusion drawn by the learned Commissioner (Appeals) for the year under appeal i.e., assessment year 2008-09 are set aside and assessee's claim for deduction under section 80IC is allowed. 17. Since we have allowed the assessee's claim on merits, therefore,....