9911796707
TMI Blog2014 (10) TMI 177X X X X Extracts X X X X X X X X Extracts X X X X ..... he older units owned by the same K. Girdhar Group and therefore, was ineligible for the deduction. According to the Assessing Officer, the new unit should be set up separately with new plant and machinery for producing either the same commodities or some distinct commodities. In the case of the assessee, the unit has been formed completely out of the old assets which were being used by the K. Girdhar Group's manufacturing division. The machineries transferred from the old unit are more than 20%. The assessee has obtained by transfer assets worth more than 53 lakhs. Therefore, the case is of reconstruction as the assessee is under the control of the same group considering the holding pattern. 4. On appeal, the CIT(A) held as under:- "4.1 I have considered the submission made by the appellant and observation of the A.O. The A.O. has rejected the claim u/s.80JJAA saying that a substantial portion of machinery is old and also because details and documentary evidence for the claim has not been given. The A.O. has further stated that without prejudice to the disallowance of full claim the computation of claim is also not correct because the appellant has included cost of living allowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... airconditioner unit is a part of the plant & machinery. It is not an office airconditioner but required for the proper function of the plant & machinery. The diamond tools cannot be taken out of plant & machinery. In view of the nature of work, the camera system and BMS system are also integral part of the plant & machinery to prevent theft of such small items as diamond pieces. If all these facts are taken into account the old machinery is very small part of even Block-I. The Block-I is of Rs. 6.89 crore and even if some small items which may be considered as non-essential for the plant & machinery are removed even then Block-I would be almost Rs. 6 crores whereas the old machinery purchased are just about 10 to 12% of this block. Hence, this is not a case of splitting or reconstruction. 4.2 With respect to the argument of the A.O. that cost of living cannot be added, the contention of the A.O. is entirely wrong as is clear from the provisions of Minimum Wages Act whereby Section 4 clearly specifies calculation of cost of living allowance. Cost of living allowance is clearly like dearness allowance and hence it is part of the wages. As regards the statement of the A.O. that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As per the decision of the Hon'ble Supreme Court in the case of CIT v. Gem India Manufacturing Co., reported in 249 ITR 307 (SC), polished diamond is not a new article or thing and hence cutting and polishing of uncut and rough diamonds which yields polished diamonds cannot be said to amount to manufacture or production of article or thing for the purpose of obtaining the benefit of deduction u/s 80I of the Incometax Act. In view of this clear decision of the Hon'ble Supreme Court, the assessee is not entitled to deduction u/s 80JJAA of the Act. 6. Being aggrieved against this finding of the CIT(A), the assessee is in appeal before us. The AR of the assessee has relied on the decisions of Mumbai Bench of the Tribunal in the cases of Sheetal Diamonds Ltd Vs. ITO, 47 SOT 75 (Mum), M/s. Parmes Diamonds Exports Pvt. Ltd. Vs. DCIT in ITA No.1073 to 1075/Mum/2009 and M/s. Flawless Diamond (India) Ltd. Vs. ACIT in ITA Nos.2886 & 5617/Mum/2012 and submitted that the Mumbai Bench of the Tribunal in the case of M/s. Flawless Diamond (India) Ltd., after considering the decision of the Hon'ble Supreme Court in the case of the Gem India Manufacturing Co. (supra), has held that the assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court in Gem India Mfg. Co. (supra) will not apply to the facts of the present case as in that case, there was no material on record upon which any conclusion could have been reached that the diamond cutting and polishing tantamount to manufacturing activity. It was submitted that the diamond cutting and polishing involves a very long process which 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 detailed 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he final facets. It is this stage that will determine how much brilliance and fire a diamond displays. Minor inconsistencies in symmetry and proportions can make the difference between a gorgeous diamond and a dull, lifeless stone. The Hearts and Arrows in our beautiful diamonds are the result of a skilled and mastered brililanteer." 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 jewellery. 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 Jewellery making. The rough diamonds cannot be used for the making for Jewe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by him in the assessment 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 & 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 80-IC. 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 Pages-8 to 14 of the appellate order. The assessee, in response, submitted its countercomments, rebutting the various observations and the conclusion given by the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of diamonds amounts to manufacturing or production of new article or thing. He drew our attention to the said observation of the Supreme Court Hon'ble in Gem India Mfg. Co. (supra). Thus, it cannot be held that a general proposition has been laid down by the Supreme Court Hon'ble 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 Supreme Court Hon'ble has come for consideration before the Tribunal, Mumbai Bench, in Sheetal Diamonds Ltd. v. ITO [2011] 47 SOT 75 (SC), wherein the Tribunal has discussed the detailed 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... about part 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Packers [1989] Supp. SCC 174 are as under:- "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 detailed 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. Emptee Poly Yarn (P.) Ltd. [2010] 320 ITR 665 (SC), came very heavily i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inary stones or more precisely coloured 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 2½ 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 centres 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the shape: square, oval, and 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 ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iamond, 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 with significant portions of the original rough diamond's surface (naturals) left on the finished gem. It is these naturals that provide the colour 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 ..... 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.' 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch a conclusion can be reached.' 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 (P.) 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 80-IB 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 80-IB. That exercise has not been undertaken. The reliance on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is allowed." 9. The DR could not point out any good reason to not to follow the above quoted order of the Tribunal in the case M/s. Flawless Diamond (India) Ltd. (supra). Therefore, respectfully following the same, we hold that the cutting and polishing of diamond is a manufacturing or production of article or thing for claiming deduction under section 80JJAA of the Act. Accordingly, we set aside the orders of the lower authorities and direct the Assessing Officer to allow the deduction u/s 80JJAA of the Act to the assessee. Thus, these grounds of appeal of the assessee are allowed. 10. Ground No.3 of assessee's appeal reads as under:- The Learned CIT(A) erred in law and on facts and in circumstances of the case not considering the Joint Business Agreement (JBA) entered between Tirupati Organisers Private Limited ('TOPL') and the appellant as a sharing of business arrangement and ruled that the appellant ought to have deducted tax from the payment of share to TOPL under section 194I of the Act as rent payment instead contract payment under section 194C of the Act. 11. Ground No.1 of Revenue' appeal reads as under:- On the fact and circumstances of the case and in law, the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S has to be deducted U/S.194C or 194H of the Act and hence there is no question of disallowance u/s.40(a)(ia) of the Act. 6.3.1 The appellant argued that the learned AO wrongly held that amount shared is an expense and hence provisions of section 40(a)(ia) does not apply for the following reasons:- The appellant company during the course of assessment proceedings explained to the AO that the amount appellant company has title to only net income and accordingly what is credited to profit and loss account is net income after giving share under JBA to TOPL. Thus as such computation of business income itself starts with net income as the amount shred is not an income of the appellant company. The expenses are claimed against net income. Thus, what the AO has done is that he first brought to tax the amount shared which is not even income of the appellant due to overriding title by grossing up the sales / income from operations and thereafter holding that amount shared can be claimed as and expenses which is disallowable u/s. 40(a)(ia) on account of non deduction of tax at source either u/s. 194C or S.194H of the Act. In order to arrive at the conclusion he resorted to findings of Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Overriding title. However just to establish his wrong notion, the AO has resorted to so called piercing of corporate veil and alleging that if corporate veil is pierced then form and entity are different and come into being for tax evasion! The AO is hooting the horn of tax evasion and colourable device at number of places in loud manner to shadow fallacy of the arguments advanced by him as none of the claims are supported by any evidence. In fact if for the sack of argument if the allegation of the AO is accepted and ritual of piercing so called corporate veil is done then appellant will be at benefit as it will get the claim of depreciation and other expenses of TOPL as well as its losses which will reduce it income as well as tax! The computation of income of TOPL for subject assessment year is attached herewith for your immediate reference. Thus, by corporate veil if pierced, will be beneficial to the appellant! Moreover, the AO is only stating that sharing is only from job charges from K Girdharlal which is not true. It may be noted that the sharing has also been done from the export proceeds received during the year under consideration as evident from working given in fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant further stated that:- Thus, in view of the aforesaid fact JBA is not a contract for carrying out any work. TOPL is not carrying out any work for appellant. The relationship between appellant and TOPL is not of Contractor and Principal and TOPL has been performing task for its own and not for appellant, therefore the provisions of section 194C of the Act can not be fastened. The AO has failed to perceive this distinction and made subject disallowance on absolutely incorrect ground. Moreover, he has also made baseless allegation without any enquiry with regard to tax evasion etc which are nothing but to hide the reality which if examined will turnout absolutely fatal. We failed to understand why AO is taking so much about so called complex tax planning of K Girdharlal which he deem to be relative of the appellant ( which is also untrue) without any relevance to appellant case, If at all it is relevant then it will be in assessment of K Girdharlal and not in case of appellant. The AO has also not interpreted the law lay down by Hon'ble Apex Court in the case of ACC Ltd (Supra). The Hon'ble Mumbai High Court in the case of ITO (TDS) v Shringar Cinema P Ltd (2008) 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.2 crore of 5% of the net turnover whichever is more is clearly a payment being made by the appellant company. The entire agreement has no such clause whereby this gives an overriding title. The clause also says that no further profit will be shared and TOPL will have no share of losses. It will get Rs. 1.2 crore even after the loss. This contention is, therefore, rejected. 7.2.1 As regards the argument of the A.O. that the assessee should have deducted the TDS u/s.194C, it is stated that the A.O. had in fact first considered if the provisions of Section 194H were applicable or not. The A.O. has himself not pursued the line of invoking the provisions of Section 194H. From the facts as discussed above, it is clear that neither the provisions of Section 194H nor the provisions of Section 194C are attracted. The provisions of Section 194H are not attracted even as per the A.O., since the TOPL cannot be regarded as an agent. If the TOPL is agent then the question would arise as to on behalf of whom TOPL is acting. Hence, the provisions of Section 194H are not attracted. 7.2.2 The provisions of Section 194C are also not attracted because under this provision the payment being consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the conclusion arrived at by the High Court. Decision of the Calcutta High Court in CIT v. Shambhu Investment P. Ltd. [2001] 249 ITR 47 affirmed. 7.2.3 In view of above decision providing building and other infrastructure amounts to substantially renting the property and, therefore, the payment made by the appellant is more in the form of rent. In view of the above, the appellant was not required to deduct TDS either u/s 194H or 194C but it was required to deduct TDS u/s.194-I. 7.2.4.1 However, the services, namely, housekeeping, canteen and security services can at best be called contract related services, but there is no separate bifurcation available regarding payment in respect of these items. However, in the absence of break-up of payment for building and infrastructure separately from these services, the payment being composite, it cannot be held that the payment is covered U/S.194C mainly because the substantial payment is in respect of building and infrastructure and not for the services. In this regard, the decision of the Hon'ble Delhi High Court in the case of Dabur India Ltd. (283-ITR-197) and the decision of the Hon'ble Punjab & Haryana High Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been held above that the assessee may have been liable for TDS u/s. 194-1 it needs to be examined whether the appellant is hit for provisions of Section 40(a)(ia) or not. The appellant has argued that it is not hit by the provisions of Section 40(a)(ia) because rent has been included in the provisions of Section 40(a)(ia) only w.e.f. 01.04.2006, i.e. A.Y. 2006-07. The contention of the appellant is correct. Hence, during the year the appellant is not covered by the provisions of Section 40(a)(ia). Therefore, the disallowance u/s.40(a)(ia) is deleted." 15. Before us, it was submitted by the AR of the assessee that the assessee has entered into a "Joint Business Agreement" (JBA) with "Tirupati Organisers Pvt. Ltd." (TOPL). The said agreement has been made a part of assessment order and a copy of its English translation is placed at page no.27 to 31 of the paper-book. According to the said JBA, Tirupati Organisers Pvt. Ltd. shall contribute buildings and infrastructure facilities (viz. electric installation, canteen, etc consonant to diamond factory), house-keeping, security, etc. to the joint business whereas the assessee shall carry out the activities of cutting and polishing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' and not 'Income from House Property'. He placed reliance on the order of the ITAT, Ahmedabad Bench in the case of ACIT v. M/s. Tirupati Organisers Pvt. Ltd. in ITA No.2920/Ahd/08, 977/Ahd/09 with CO 96/Ahd/09 and 1573/Ahd/10 with CO 230/Ahd/10. He also submitted that the whole arrangement is accepted by the Tribunal in the hands of the recipient and therefore the same may kindly be accepted in the hands of the payer. He also submitted that even 194I is also not applicable as had it been merely rental income as alleged by Ld. CIT(A), it would have been taxed under the head 'Income from House Property' in the hands of the recipient which not so; in any case even if 194I applies, disallowance u/s 40(a)(ia) cannot be made since S. 194I was included u/s 40(a)(ia) w.e.f. 01.04.2006 i.e. AY 2006-07. 16. We have heard the rival submissions, perused the orders of the lower authorities and material available on record. In the instant case the expenses of Rs. 2,28,64,310/- was disallowed by the Assessing Officer by invoking provisions of Section 40(a)(ia) on the ground that the assessee failed to deduct tax at source on the aforesaid expenses which the assessee was liable to deduct u/s 194 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as commission. It is a settled position of law that the nature of an amount is to be determined as per the definition of section and provision of the law and not as per the nomenclature given to it by the parties in their agreement. Thus, the Assessing officer was not justified in stating that the amount in agreement was commission merely because the parties stated so in the agreement, without ascertaining the true nature or character of the payment. As per Section 194H, ""commission or brokerage" includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities." In the instant case, no material has been brought on record to show that the recipient of the payment in question acted for and on behalf of the assessee and therefore the payment in question cannot be considered as commission or brokerage within the meaning of Section 194H of the Act. 20. Further, Section 194C reads as under:- "Any person responsibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nth. He further submitted that looking to the volume of assessee's business, such meager expenses towards travelling and conveyance allowance to the employees stand automatically justified. Further, he submitted that the disallowance out of travelling and conveyance expenses on estimate basis without pointing out any discrepancies is not justified. In this respect, he placed reliance on the following decisions:- a) Roger Enterprises Pvt Ltd vs. Inspecting Asst. Commissioner (52 TTJ 198 (Delhi)) b) Sudesh Ch. Talwar vs. ACIT in ITA No.327/Kol/2010 26. We have heard the rival submissions, perused the orders of the lower authorities and material available on record. We find that the disallowance of expenditure was made without pointing out any defect in vouchers or completeness of the vouchers for expenses maintained by the assessee. Therefore, disallowance made is unsustainable. We, therefore, do not find any error in the order of the CIT(A) which is confirmed and this ground of appeal of the Revenue is dismissed. 27. Ground No.4 of the assessee's appeal is against disallowance of computer expenses incurred by the assessee by treating as capital in nature. 28. At the time of hea ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
