AI Drafter 
TaxTMI 
TaxTMI 
2018 (4) TMI 1634
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....ective and not retrospective as claimed by the assessee?" 3. The appellant assessee is a registered partnership firm and is engaged in the business of import of rough diamonds and export of finished diamonds after cutting and polishing them. For the assessment year 2001­2002, the assessee had filed the return of income declaring total income of Rs. 18.28 lacs (rounded off). The assessee had claimed deduction of Rs. 68.74 lacs (rounded off) under section 10B of the Income Tax Act, 1961. The Assessing Officer framed scrutiny assessment under section 143(3) of the Act on 28.2.2003. In such order, he noted that the assessee firm has its manufacturing unit at Surat, Ahmedabad and Visnagar. It had also started a separate manufacturing unit at Surat which was a hundred percent export oriented unit. Income from such activity was claimed exempt under section 10B of the Act and that present one was a second year of such EOU. After completing such assessment, the Assessing Officer reopened the assessment by issuing notice under section 148 of the Act on the ground that section 10B was amended by which explanation 4 was inserted by the Finance Act, 2003, providing that for the purposes ....
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.... have manufactured or produced article or thing. Cutting and polishing diamonds is a manufacturing activity. From the rough diamonds, the processed and polished diamond is brought into existence through a complex and sophisticated process. The original product i.e. rough diamond and the end product i.e. cut and polished diamonds are two entirely different commodities having different uses, different markets and different values. Uncut and unpolished diamond is put only to industrial uses. Polished diamond is principally used for gems and jewellery. (3) Counsel pointed out that Bombay High Court in case of Commissioner of Income­tax v. Fateh Granite (P) Ltd reported in (2009) 222 CTR 638 (Bombay), held that cutting and polishing of granites amount to manufacture or production of article or thing. It was observed that the expression "produce" is wider than "manufacture". It was noticed that Section 10B of the Act uses expression "manufacture or produce". (4) Counsel pointed out that the decision in case of Gem India Mfg. Co.(supra), was considered in the later judgment by the Supreme Court in case of Heaven Diamonds (P) Ltd. (judgment dated 18.11.2011) explaining its ear....
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....ction of article or thing. 8. We may first consider whether this issue is covered by the judgment of the Supreme Court in case of Gem India Mfg. Co.(supra). It was a case in which in the context of deduction under section 80­I of the Act, the question cropped up whether cutting and polishing diamonds amounted to manufacture or production of article or thing. The Tribunal and the High Court having accepted the assessee's stand, the Supreme Court reversed the same making the following observations : "6. There can be a 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 the record upon which such a conclusion can be reached." 9. Two things thus emerge from this judgment. One that the Supreme Court readily accepted that the raw and uncut diamonds is subjected to a process of cutting and polishing which yields the polished diamond. However this would not be synonyms to saying that polished diamond is a new article or thing wh....
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.... India Mfg. Co. (supra) to that particular case since the assessee was unable to demonstrate the process undertaken for conversion of diamond into a polished or cut diamond. We therefore, do not believe that by virtue of judgment in case of Gem India Mfg. Co.(supra), any further discussion or inquiry is impermissible. 12. We may now test the assessee's contention that explanation 4 to section 10B was either clarificatory or having retrospective effect. Section 10B of the Act, as is well­known, provides for deduction of profits and gains derived by a hundred per cent export­oriented undertaking from export of articles or things for a specified period from the time undertaking begins to manufacture or produce articles or things. Explanation 4 which was added to the said section with effect from 1.4.2004 provides that for the purposes of this section, "manufacture or produce' shall include the cutting and polishing of precious and semiprecious stones. In plain terms, this provision has been made applicable without any retrospectivity. The language of the provision also does not make it clarificatory. The budget speech of the Finance Minister explaining introduction ....
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....hether the assessee satisfied the requirement of the said section. It is in this context, the question arises whether the activity of cutting and polishing diamonds amounts to manufacture or production of article or thing. 14. The question whether a particular process amounts to manufacture has occupied the attention of the Courts on numerous occasions. Such a question typically arises in the background of exciseability of the product. The Supreme Court has laid down certain principles and guidelines to ascertain whether a particular activity amounts to manufacture. In case of India Cine Agencies v. Commissioner of Income­tax reported in (2009) 308 ITR 98(SC), the Supreme Court considered the question whether conversion of jumbo rolls of photographic films into small flats and rolls of desired sizes amounted to production. In this background, it was observed as under : 5. 'Manufacture' is a transformation of an article, which is commercially different from the one, which is converted. The essence of manufacture is the change of one object to another for the purpose of making it marketable. The essential point thus is that, in manufacture something is brought into ex....
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....es bringing some kind of change to raw material at various stages by different operations. Process must have effect of bringing change or transformation in raw material and also lead to creation of any new and distinct and excisable product. 16. In case of Servo­Med Industries Pvt. Ltd v. Commissioner of C. Ex. Mumbai reported in 2015 (319) ELT 578 (SC) in a detailed analysis of the case law, it was held that sterilization of syringes and needles though involved process of removal of foreign matter from goods and unsterilized syringes and needles were of no commercial use without sterilization, the process of sterilization did not amount to manufacture. 17. It is undisputable that the rough diamonds are subjected to the process of cutting and polishing to bring into existence the polished diamonds. Such process has been noted by the Tribunal in the judgment in case of Flawless Diamond (India) Ltd(supra) as under : "'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 ordinary stones or more precisely coloured glass type wi....
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....ding 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 fine 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 a faceted 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 f....
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.... of finished stones as it relates to per carate 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 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 percarat 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 bett....
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....lapidary tool holding gemstones for cutting or polishing). Bruting the girdle. Blocking four main pavilion facets. Transferring to another dop in order to rotate the stone. Blocking four main crown 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 lookin....