TMI Blog2014 (9) TMI 261X X X X Extracts X X X X X X X X Extracts X X X X ..... r polished diamond - the assessee has duly placed on record the entire process and the stages through which the rough diamond undergoes for becoming the polished diamond, which is a separate and distinct product and has a different usage - Such a process has neither been rebutted by the Revenue nor any other counter opinion have been sought to contradict the assessee’s version of the process - 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 u/s 80IC - the order of the CIT(A) is set aside and assessee’s claim for deduction u/s 80IC is allowed – Decided in favour of assessee. - ITA No.2886/Mum./2012, ITA No.5617/Mum./2012 - - - Dated:- 14-2-2014 - R. C. Sharma, AM And Amit Shukla, JM,JJ. For the Appellant : Mr. Vijay Mehta For the Respondent : Mr. Rajesh Ranjan Prasad ORDER Per Amit Shukla, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich requires special skill to make rough diamond into polished diamond. The rough diamond and polished diamond have altogether different use, purpose and value in the market. The assessee explained the detail process which is required for cutting and manufacturing of raw diamond and converting the same into a polished diamond. These processes, as elaborated by the assessee, are reproduced herein below because the same has a great significance on the issue involved. Upon reaching its destination the rough diamond is carefully examined, nowadays with the help of computers, decisions are made on how it should be cut to yield the greatest value. After the stone's size and shape are determined, taking into consideration the rough's shape, as well as the quantity and position of its internal inclusions, the stone is marked and usually sawed. The stone then goes through a series of diamond cutters who each have inclusions, the stone is marked and usually sawed. The stone then goes through a series of diamond cutters who each have their own specialty, finally, the diamond is polished and cleaned, all ready for sale. 2. The rough diamond is given to the splitter and it is he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. Further, the assessee also explained the purpose for which rough diamond is used and also the usage of polished diamond in the following manner: The rough diamond is used for following purposes: 1. To cut, polish or wear, away any material including other diamonds. 2. Use of diamond powder as an abrasive. 3. Use in laboratories as containment for high pressure experiments, high performance bearings used in specialized windows. 4. Use of diamond as semiconductor suitable to build microchips. 5. Use as heat sink in electronics. The polished diamond is used for following purpose: 1. Used in the manufacturing of jewelry. The polished diamond is altogether a different product than to rough diamond. The rough has the industry use whereas the polished diamonds are used for Jewelry making. The rough diamonds cannot be used for the making for Jewelry Various decisions were also relied upon to explain the meaning of the word manufacturing especially the decision of the Hon'ble Supreme Court in ITO v/s Arihant Tiles and Marbles, [2007] 320 ITR 79 (SC). 4. The Assessing Officer rejected the assessee s contention and held that the cutting and poli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent order. He also strongly relied upon the definition of the word manufacture introduced by the Evidence Act, 2009, in section 2(29BA) and submitted that the decision of the Hon'ble Supreme Court in Arihant Tiles and Marbles (supra) will not be applicable in the light of the new definition. The Assessing Officer also observed that for making the finished diamond, number of process are though involved, however, such activities cannot constitute manufacturing for the purpose of being eligible for deduction under section 80IC. He also referred to the definition of manufacturing and definition given in exim policy and section 2(r) of Special Economic Zone Act, 2005. He again reiterated the applicability of the judgment of the Hon'ble Supreme Court in Gem India Mfg. Co. (supra) to contend that this issue has been set at rest by the Apex Court. The detailed explanation given in the remand report by the Assessing Officer has been incorporated by the learned Commissioner (Appeals) from Page 8 to 14 of the appellate order. The assessee, in response, submitted its counter comments, rebutting the various observations and the conclusion given by the Assessing Officer in the remand r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounts to manufacturing or production of new article or thing. He drew our attention to the said observation of the Hon'ble Supreme Court in Gem India Mfg. Co. (supra). Thus, it cannot be held that a general proposition has been laid down by the Hon'ble Supreme Court that in every case even where the entire process of manufacturing has been explained, then also the said judgment would be applicable. He further submitted that the said decision of the Hon'ble Supreme Court has come for consideration before the Tribunal, Mumbai Bench, in Sheetal Diamonds Ltd. v/s ITO, [2011] 47 SOT 75 (SC), wherein the Tribunal has discussed the detail process through which rough diamond is converted into polished diamond and both are commercially different commodity. The Tribunal has also referred to the decision of the Hon'ble Supreme Court in Gem India Mfg. Co. (supra) and also distinguished on the basis that once the entire material has been placed with regard to the process of manufacturing, then the said decision cannot be held to be applicable. He drew our attention to the various observations and findings given by the Tribunal in the said decision. He further made a very import ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of manufacturing. Once the Assessing Officer has accepted the manufacturing of jewellery from the said undertaking, the entire profit of the undertaking has to be allowed as deduction, even though part of the manufacturing involved for cutting and polishing of diamond is not considered as manufacturing by the Department. On this ground also, the assessee s claim is liable to be allowed. 9. Per contra, the learned Departmental Representative, on the first proposition of the learned counsel, submitted that even though the assessee s claim has been allowed in the previous assessment year, the same cannot be held to be res judicata in this year as the claim for deduction under Chapter VIA has to be allowed in view of the statutory provisions and the formalities prescribed therein. The doctrine of consistency cannot be held on the question of law because if something is unsustainable in law, then definitely a different view can be taken from the earlier year. On merits, he submitted that once the Supreme Court has directly answered the question that cutting and polishing of diamond does not amounts to manufacture then it is law of the land and qua that issue it has attained fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder: Commonly manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another and indeed there be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacturer can be said to take place. 11. Further, the Hon'ble Supreme Court in Arihant Tiles and Marbles (supra) has cited catena of case laws on this subject and observed that the detail process undertaken for the purpose of production or manufacturing or article or thing has to be examined for coming or reaching to any conclusion. The Supreme Court also referred to the new definition brought in statute in section 2(29BA). Similarly, the Hon'ble Supreme Court in CIT v/s Emptee Poly Yarn Pvt. Ltd., [2010] 320 ITR 665 (SC), came very heavily in stressing the fact that the Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed glass type with uneven surface and were of uneven shape. All the samples were of dark brownish / greenish/bluish colour measuring about 1 c.m. to 2 c.m. Ld. Counsel of the assessee produced cut and polished diamonds in the size of 10 cents to 1 carat, which were looking sparkling white. It was explained before us with reference to the procedure for cutting and polishing or processing of the diamonds as listed out by one Mr. Kantilal Chhotalal in the book titled as 'Diamonds From Mines To Markets.. In this book after stating that diamond cutting is a labour incentive industry and India was one of the main centers for the cutting. The process has been briefly discussed as under: The ultimate value of a diamond 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 prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so on. The second relates to the specific quality of cut within the shape, and the quality and price will vary greatly based on the cut quality. Since diamonds are very hard to cut, special diamond-bladed edges are used to cut them. The first major development in diamond cutting came with the Point Cut during the latter half of the 14th century: the Point Cut follows the natural shape of an octahedral raw diamond crystal, eliminating some waste in the cutting process. Further, various tests have been explained as under: Planning Diamond manufacturers analyze diamond rough from an economic perspective, with two objectives steering decisions made about how a faceted diamond will be cut. The first objective is that of maximum return on investment 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, which is more likely to be a poorly cut stone. Colour retention In colored diamonds, cutting can influence the color grade of the diamond, thereby raising its value. Certain cut shapes are used to intensify the color of the diamond. The radiant cut is an example of this type of cut. Natural green color diamonds most often have merely a surface coloration caused by natural irradiation, which does not extend through the stone. For this reason green diamonds are cut with significant portions of the original rough diamond's surface (naturals) left on the finished gem. It is these naturals that provide the color to the diamond. Turnaround minimization The other consideration of diamond planning is how quickly a diamond will sell. This consideration is often unique to the type of manufacturer. While a certain cutting plan may yield a better value, a different plan may yield diamonds that will sell sooner, and thereby returning the investment sooner. Cleaving or sawing Cleaving is the separation of a piece of diamond rough into separate pieces, to be finished as separate gems. Sawing is the use of a diamond saw or laser to cut the diamond rough into separate pieces. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 13. The aforesaid judgment has been quoted solely for the purpose of explaining the entire process through which rough diamond undergoes to become a separate and distinct product of being a polished diamond and we need not reiterate again. The same process and explanation has been given by the assessee before the Assessing Officer as well as before the learned Commissioner (Appeals), which has not been rebutted at all. Even going by the new definition of manufacture as envisaged in section 2(29BA), the process of transformation of rough diamond into polished diamond, results into a new and distinct or article having different name and use. Thus, the entire process of transformation in this case can be held as manufacturing within the ambit of section 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed. 15. Later on, the Supreme Court in the judgment and order dated 18th November 2011, passed by the Division Bench of Three Judges in Heaven Diamonds Pvt. Ltd. (supra), have categorically held that the reliance on the decision of Gem India Mfg. Co. (supra) may not be correct as in that case the assessee could not demonstrate the process undertaken by it to convert raw diamond into a superior commodity. The entire judgment of the Hon'ble Supreme Court for the sake of ready reference is reproduced herein below: We find from the impugned order of the Tribunal that there is no discussion on the process undertaken by the assessee, who claims benefit of section 80IB of the Act. The assessee imports raw diamonds and applies thereon the process of sawing, turning, profiling, cutting, drilling, polishing, etc., by the use of sophisticated machineries resulting in production of a superior marketable commodity. Detailed procedure has been set out in the paper book. The Tribunal ought to have examined the process as to whether such process would constitute manufacture under section 80IB. That exercise has not been undertaken. The reliance on the judgment of this Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have allowed the assessee s claim on merits, therefore, we are not expressing any opinion raised by the learned counsel that if the claim for deduction has been allowed in the earlier year, the same should be allowed in this year also. Thus, the ground no.1 to 5 raised by the assessee are treated as allowed. 18. In the appeal for the assessment year 2009 10, exactly same issue has been raised which are arising out of similar facts and findings of the learned Commissioner (Appeals). Therefore, the findings given above will apply mutatis mutandis in this appeal also and consequently, the assessee s claim for deduction under section 80IC is allowed. 19. The next common issue raised by the assessee in both the years under appeal relates to charging of interest under sections 234B and 234D. 20. Both the parties admitted before us that this ground is consequential in nature. Accordingly, we direct the Assessing Officer to give consequential effect while re computing the income of the assessee keeping in view our findings given above and in accordance with the provisions of law. 21. In the result, assessee s appeals for the assessment year 2008 09 and 2009 10 are allowed. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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