TMI Blog2011 (3) TMI 1044X X X X Extracts X X X X X X X X Extracts X X X X ..... les Tax laws that blocks converted into polished slabs and tiles after undergoing the process indicated above certainly results in emergence of a new and distinct commodity - Held that: assessee was engaged in the business of manufacture of cutting and polishing of rough diamonds and, accordingly, eligible for deduction under section 80-IA - Decided in favor of the assessee - 6687 TO 6689 (MUM.) OF 2003 - - - Dated:- 23-3-2011 - T.R. SOOD, R.S. PADVEKAR, JJ. B.V. Jhaveri for the Appellant. Sumeet Kumar for the Respondent. ORDER T.R. Sood, Accountant Member. In all these appeals a common dispute regarding rejection of claim for deduction under section 80-IA has been raised. 2. After hearing both the parties, we find that a survey under section 133A was carried out on 24-3-1999 wherein according to the Assessing Officer it was found that the claim of deduction under section 80-IA is bogus and, accordingly, a notice under section 148 for assessment years 1996-97 1997-98 was issued and notice under section 143(2) for assessment year 1998-99 was issued. During the survey a statement of the Managing Director Shri V.T. Shah was recorded. He was asked to show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 Copy of letter received from Government of India, Ministry of Commerce dtd. 30-3-98 - 1 page 9 Copy of letter received from Administration of Daman Diu, Department of Labour Employment, Daman - 1 page 10 Copy of letter received from Telecom, District Manager, Valsad dtd. 26-7-95 - 1 page 11-12 Copy of Bank statement of Bank of India, Vapi Branch -2 pages 13-14-15 Copy of Registered A/D (Daman Factory) received from Annual Survey Industries on India Government Service - 3 pages 16 Copy of envelope received from Sales Tax Office - 1 page 17 Copy of Registered A/d send to Daman - 1 page 18 to 23 Copy of Rep licences issued against Exports (received at Daman) - 6 pages 24 to 31 Copy of Angadia bills received from Mangilal K. Purohit dt. 28-2-98, 31-3-98, 31-12-97, 30-11-97, 30-9-97, 31-8-97, 31-7-97, 30-4-97 - 8 pages 32 It contains three Railway Tickets - ( a ) Shatabdi Express dt. 30-7-97, Mumbai to Vapi (b) Return Ticket - Vapi to Mumbai dt. 30-7-97 (Gujarat Express_ - Factory Inspection ( c ) Gujarat Express dt. 10-09-97 - Vapi to M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It contains ( a ) bills of Rajesh Hardware Stores - Machinery parts Daman dt. 29-7-97 ( b ) 2 Bills of Repairing charges of Tube Lighting repairing, machine repairing Ghar Chakar, Daman 68 It contains @ 3 bills of Purohit stationery General Stores, Daman dt. 20-11-97, 8-7-97 ( b ) bill of Xerox, Valsad 69 Copy of Bill - Prince ceramics Daman dt. 22-7-97 (Machinery Part) 70 It contains ( a ) bill of Darshana Electric Stores dt. 19-6-97 (Tubelight Chawk 35,00,000 9 Ps.), ( b ) Electricity bills 2 Nos. for the month of April, 97 Rs. 2800 and for the month of May '97 Rs .2455 71 Bill of N.J. electricals - Daman (Electrical items - Tube Chawk purchase dt. 25-7-97 72 Copy of bill of Hotel Somnath Inn, Daman - Room Charges dt. 29-7-97 to 30-7-97 73 Copy of bill of Tarun Diamond Tools - machinery parts purchased from Surat dt. 6-12-97 74-76 Few copies of workers identity Card 77 Few Nos. of workers photo with name - Daman Factory 78 to 95 Few copies of workers Bio-data - Daman Factory 96-103 Few copies of wages register towards w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, following the decision of the Tribunal in the case of Pink Star v. Dy. CIT [2000] 72 ITD 137 (Mum.), wherein it was held that cutting and polishing of diamonds is not a manufacturing activity, the claim was rejected. Further reliance was placed on the decision of the Hon'ble Bombay High Court in the case of CIT v. London Star Diamond Co. (I.) Ltd. [1995] 213 ITR 517/79 Taxman 276. 4. Before the ld. CIT(A), it was mainly submitted that the survey was conducted on 24-3-1999 by which time the manufacturing operations had already been stopped and, therefore, observations made during the survey could not be applied for the earlier period. It was vehemently argued before him that the assessee was doing business of cutting and polishing of diamonds and reliance was placed on various documents furnished before the Assessing Officer. 5. The ld. CIT(A) after considering the submissions, decided the issue against the assessee vide para 3.1 which is as under: "3.1 The above submissions of the AR as well as the contentions of the Assessing Officer on this issue have been considered by me carefully. The appellant is engaged in the business of cutting polishing of diamonds. The cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only allegation of the Assessing Officer against this is that the original photograph was not produced but the same was not demanded. Assessing Officer has further mentioned that nothing in respect of electricity consumption was stated. He submitted that copies of some of the electric bills were produced which are available at pages 64-65 of the paper book. Similarly, copies of SSI certificate, factory license, certificate of sales tax registration and pollution certificate issued by various departments clearly show that manufacturing operations were being carried on by the assessee. Copy of the inspection report of the ESI Corporation also proves the case. He argued that Assessing Officer has observed that the bank statement does not incorporate address of the assessee but it was only sample of the bank statement and other bank statements were submitted which contained various transactions. A copy of the Annual Survey of industries certificate, copies of letter of Statistics department regarding submission of information etc. clearly shows that assessee was doing the manufacturing business. Further, copies of telephone bills, bank statement, REP licenses of Daman factory, bio-dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the Tribunal in the case of Pink Star (supra) and in that case the Tribunal, in turn relied on the decision of the Hon'ble Bombay High Court in the case of London Star Diamond Co. (I.) Ltd. (supra), which has also been relied on by the Assessing Officer and the CIT[A], wherein it was held that cutting and polishing of diamonds may not be manufacturing activity. But at the same time in the case of London Star Diamond Co. (I.) Ltd. (supra), the Hon'ble High Court has clearly observed that the activity of cutting and polishing of diamond would definitely constitute processing. He then referred to the decision of the Hon'ble Supreme Court in the case of Vijay Ship Breaking Corpn. v. CIT [2009] 314 ITR 309/[2008] 175 Taxman 77. In this case the question was whether breaking of ship would constitute 'manufacturing' or 'production' for the purpose of deduction under section 80HH and under section 80-I. The Hon'ble Supreme Court after referring to the decision in the case of CIT v. N.C. Budharaja Co. [1993] 204 ITR 412/70 Taxman 312 observed that the word 'production' has a wider connotation than the word 'manufacture'. It was further observed that the word 'production' when us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dimension, depending upon the quality of rough diamond. This whole process has to be carried out by skilled workers. According to him, rough diamonds or cut diamonds are totally different product. Then he referred to export and import policy issued by the Government of India, relevant copy of which is placed at pages 307 to 311 of the paper book and at page 309 at clause 3.31 the word "manufacture" has been defined and includes bringing of any article into existence by various processes including polishing and, therefore, it would be covered by that definition. He also relied on the decision of the Third Member decision of the Tribunal in the case of Asstt. CIT v. National Lamination Industries [2007] 109 ITD 181 (Ahd.)(TM), wherein it was clearly held that the expression "manufacture" involves a concept of change effected to a basic raw material resulting in the emergence or a transformation into a new commercial commodity and since cut and polished diamonds are totally different from rough diamonds, therefore, cutting and polishing would constitute manufacturing activity. 12. On the other hand, ld. DR referred to the copy of statement recorded from Managing Director Shri V.T.Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P.) Ltd. (supra) is concerned, that decision is related to marble blocks and could not be applied in the case of cutting and polishing of rough diamonds. Therefore, cutting and polishing of diamonds would not constitute manufacturing and, thus, not entitled for deduction under section 80-IA. 14. In the rejoinder, Ld. Counsel of the assessee submitted that as pointed out earlier, the questions which were asked from the Managing Director Shri V.T. Shah during the survey were much after the factory has already been closed and, therefore, some of the informations may not be available after the closure. In any case, Shri V.T. Shah had suffered a heart problem and had undergone two bypass surgeries and his statement was recorded immediately after the surgery and, therefore, being away for quite sometime, he could not answer many questions readily. He again referred to page 81 and pointed out that the address of Shri Yadav was duly given to the department. He again referred to page 81 of the paper book which is a copy of the bio-data of Shri Yadav which was duly furnished to the Assessing Officer. In fact, copies of bio-data of many factory workers were supplied to the department and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer like electricity bills, letter from electricity department that meter was not functioning, copies of letter received from administration of Daman Diu Labour Deptt., letter from the Department of Statistics for supply of information and all these only go to show that some factory was running. Then assessee had also furnished copy of the production reports, copies of some stock register, hotel bills, railway tickets, telephone bills, bills for purchases of machineries from various parties and all these documents have not been doubted but they have been simply brushed aside. If no manufacturing was taken place then what for these expenses were incurred for. Further, copies of REP licenses furnished at pages 18 to 23 of the paper book also shows that these have been issued at the assessee's address at Daman for import of rough diamonds. If no manufacturing operations were being conducted how assessee was able to import rough diamonds at Daman. This only shows that assessee must have done some manufacturing activity at Daman and accordingly we hold that assessee was doing manufacturing operations at Daman factory. 16. As far as the issue whether cutting and polishing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ures polished goods from rough diamonds. Diamond cutting includes: Cleaving, splitting the stone along a place of cleavage; Sawing, 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 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 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, Germ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 per cent. 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 jewellary 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) diamond, which is more likely to be a poorly cut stone. Colour retention In coloured diamonds, cutting can influence the colour grade of the diamond, thereby raising its value. Certain cut shapes are used to intensify the colour of the diamond. The radiant cut is an example of this type of cut. Natural green colour diamonds most often have merely a surface colouration caused by natural irradiation, which does not extend through the stone. For this reason green diamonds are cut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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' depends on many factors and while buying rough diamonds only an expert can evaluate as to which size the final product would be and even such opinion is not final because while cutting, the rough diamond may get cut into smaller pieces and in that case it has to be finished as such. But a plain look at rough diamond and finished diamond would show that they are totally different products. Further, only cut and polished ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Explanation 4 to section 10A has been further held to be of retrospective operation being clarificatory nature in the decision of the co-ordinate Bench of the Tribunal in the case of Bramhecha's Impex (P.) Ltd. (supra). In any case, the word 'manufacture' has been defined in import and export policy, copy of which is placed at pages 306 to 311 of the paper book issued by the Ministry of Commerce, Government of India. The word 'manufacture' has been defined at clause 3.31 which reads as under: "'Manufacture' means to make, produce, fabricate, assemble, process r bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes, such as reingeration, repacking, polishing, labelling and segregation. Manufacture, for the purpose of this Policy, shall also include agriculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining." 19. Now coming to the two decisions of the Hon'ble Supreme Court, let us first go to the decision in the case of Gem India Mfg. Co (supra). The Hon'ble Supreme Court observed the facts of the case as under: "Section 80-I gives a deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making slabs; (iv) sawn slabs were reinforced by filling cracks; (v) slabs were polished in polishing machines and cut into required dimensions/tiles; and (vi) polished slabs and tiles were buffed by shiners. The question was whether the assessee was entitled to the benefit of deduction under section 80-IA of the Income-tax Act, 1961. The High Court accepted the claim of the assessee that it was entitled to the claim of deduction under section 80-IA since the polished slabs were manufactured/produced from the marble blocks. On appeal to the Supreme Court: Held, affirming the decision of the High Court, that this was not a case of merely cutting marble blocks into slabs. There was the further activity of polishing and ultimate conversion of the blocks into polished slabs and tiles. There were various stages through which the blocks had to go through before they became polished slabs and tiles. The original block did not remain marble block; it became a slab or tile. Blocks were converted into polished slabs and tiles resulting in the emergence of a new and distinct commodity. Such an activity was something beyond manufacture and brought a new product into existence. The stepwise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocesses would involve "production" within the meaning of section 32A(2)(b)(iii) of the Income-tax Act, 1961, and consequently, the assessee was entitled to the benefit of investment allowance under section 32A of the Income-tax Act. In that matter, it was argued on behalf of the Revenue that extraction and processing of iron ore did not produce any new product whereas it was argued on behalf of the assessee that it did produce a distinct new product. The view expressed by the High Court that the activity in question constituted "production" has been affirmed by this court in Sesa Goa's case [2004] 271 ITR 331 saying that the High Court's opinion was unimpeachable. It was held by this court that the word "production" is wider in ambit and it has a wider connotation than the word "manufacture". It was held that while every manufacture can constitute production, every production did not amount to manufacture. In our view, applying the tests laid down by this court in Sesa Goa's case [2004] 271 ITR 331 and applying it to the activities undertaken by the respondents herein, reproduced hereinabove, it is clear that the said activities would come within the meaning of the word " produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respondents are job workers and the activity undertaken by them has been recognised by various Government authorities as manufacture. To say that the activity will not amount to manufacture or production under section 80-IA will have disastrous consequences, particularly in view of the fact that the assessees in all the cases would plead that they were not liable to pay excise duty, sales tax, etc. because the activity did not constitute manufacture. Keeping in mind the above factors, we are of the view that in the present cases, the activity undertaken by each of the respondents constitutes manufacture or production and, therefore, they would be entitled to the benefit of section 80-IA of the Income-tax Act, 1961." 21. Similarly, the Apex Court in the case of Vijay Ship Breaking Corpn. (supra) has observed that ship breaking would definitely constitute production. In this case also reference was made to the decision of the Apex Court in the case of N. C. Budharaja Co. (supra) and it was observed at placitum 8 to 10 as under: "Firstly, in the case of Ship Scrap Traders v. CIT [2001] 251 ITR 806, the Bombay High Court has analysed the entire ship breaking activity, the artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction under sections 80HH and 80-I to the assessee holding that the ship breaking activity gave rise to the production of a distinct and different article. Accordingly, the said question is answered in favour of the assessee and against the Department." 22. Again, the Hon'ble Supreme Court in the case of CIT v. Empee-Poly Yarn (P.) Ltd. [2010] 320 ITR 665/188 Taxman 188 while adjudicating the issue whether deduction was available for manufacturing twisted yarn has observed as under: "Having examined the process in the light of the opinion given by the expert, which has not been controverted, we find that POY is a semi-finished yarn not capable of being put in warp or weft, it can only be used for making a texturized yarn, which, in turn, can be used in the manufacture of fabric. In other words, POY cannot be used directly to manufacture fabric. According to the expert, crimps, bulkiness etc. are introduced by a process, called as thermo mechanical process, into POY which converts POY into a texturized yarn. If one examines this thermo mechanical process in detail, it becomes clear that texturising and twisting of yarn constitutes "manufacture" in the context of conversion of PO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was an industrial company within the meaning of section 2(8) of the Finance Act, 1975?" The case has been decided for assessment year 1975-76. In those years there was a difference in rates of tax for industrial companies and other companies. The Hon'ble High Court noted that definition of industrial company given in section 2(8)(c) is as under: "'industrial company' means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining." The issue was whether cutting and polishing of diamond would constitute manufacturing or not. Though the court observed that cutting and polishing of diamond would not constitute manufacturing, but it was observed at page 521 as under: "Diamond is naturally crystallised, nearly pure carbon. It has various uses. A clear, flawless piece of this stone after being cut and polished gets transformed into an article of jewellery. Raw diamonds and cut and polished diamonds are different and distinct marketable commodities, having different uses. That being so, it is difficult to hold that a company enga ..... 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