TMI Blog2014 (12) TMI 858X X X X Extracts X X X X X X X X Extracts X X X X ..... gold into jewellery or ornaments amounts to processing, if not manufacture of goods or merchandise. Jewellery has distinctive name, character and use and is a different and new commercially saleable product. Deductions u/s 80HHC(3)(a) – Whether the Tribunal was right in holding that manufacture of gold jewellery on job work basis amounts to manufacturing activity by the assessee entitling it to deductions u/s 80HHC(3)(a) and Whether the assessee was engaged in manufacture or processing of jewellery or was merely procuring jewellery from the market as a trader and thereafter exporting the same – Held that:- A manufacturer of jewellery or ornaments might not require huge investment in machinery etc. Mode and manner of engaging and undertaking manufacturing activity could be variable - sub-clause (a) to sub-section (3) to Section 80 HHC of the Act, would be applicable in view of the factual finding recorded by the Tribunal that the aforesaid work was undertaken by the job workers under the supervision and control of the assessee and under their directions/check – Decided against revenue. - ITA No. 141/2002 - - - Dated:- 22-12-2014 - Sanjiv Khanna And V. Kameswar Rao,JJ. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax (Appeals) [(C.I.T (A), for short)], who observed that the assessee did not manufacture or process the goods, namely jewellery, and should be treated as a trader exporter of jewellery and, therefore, the Assessing Officer had rightly invoked sub-section (3)(c) to Section 80HHC of the Act. 5. Tribunal has decided the controversy in favour of the respondent assessee. Hence, Revenue is in appeal before us. 6. In order to appreciate the controversy, we would like to first reproduce relevant portions of Section 80HHC of the Act: (1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the pro-visions of this section, be allowed, in computing the total income of the assessee, a deduction to the extent of profits, referred to in sub-section (1B) derived by the assessee from the export of such goods or merchandise : Provided that if the assessee, being a holder of an Export House Certificate or a Trading House Certificate (hereafter in this section referred to as an Expo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. Explanation. For the purposes of this sub-section, (a) adjusted export turnover means the export turnover as reduced by the export turnover in respect of trading goods ; (b) adjusted profits of the business means the profits of the busi-ness as reduced by the profits derived from the business of export out of India of trading goods as computed in the manner provided in clause (b) of sub-section (3) ; (c) adjusted total turnover means the total turnover of the busi-ness as reduced by the export turnover in respect of trading goods ; (d) direct costs means costs directly attributable to the trading goods exported out of India including the purchase price of such goods ; (e) indirect costs means costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover ; (f) trading goods means goods which are not manufactured or processed by the assessee. 7. Sub-section (1) to Section 80HHC of the Act, states that an assessee engaged in the business of export of any goods or merchandise, in accordance with and subject to the provisions of the Section, shall be allowed deduction to the exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpretation. 10. The word manufacture can be given, both a wider as well as a narrower connotation. In wider sense, it simply means to make, fabricate or bring into existence an article or product either by physical labour or by mechanical power. Given a narrower connotation it means transforming of the raw material into a commercial product/ commodity or finished product which has a new, separate entity but this does not necessarily mean that the material by which the commodity is manufactured must lose its identity. The latter connotation has been accepted and applied with some moderation/clarification in several decisions, keeping in view the context in which the word manufacture has been used. The Supreme Court in Graphic Company India Limited versus Collector of Customs, (2001) 1 SCC 549 and Union of India versus Delhi Cloth and General Mills Company Limited, AIR 1963 SC 791 has held that manufacture has to be understood to mean transformation of goods into a new commodity commercially distinct and separate, and having its own character, use and name whether it be the result of one or several processes. However, every change does not result in manufacture though ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -made devices or machinery and as the making of an article or material by physical labour or applied power'; but the practice is to accept as 'manufacture' a wider range of industrial activities than such a definition would suggest. It includes articles made in situ as well as articles made in a factory. 15. The Supreme Court of the United States of America has defined the term 'manufacture' a century ago in Anheuser-Busch Brewing Assn. v. United States (1907) 52 L Ed. 336. The definition has been followed in subsequent American, English and Indian cases. The definition reads as under: Manufacture implies a change, but every change is not manufacture, and yet every change in an article is the result of treatment, labour and manipulation. But something more is necessary. ..There must be transformation; a new and different article must emerge, .having a distinctive name, character or use. 12. As noticed above, Section 10A/10B is applicable when an undertaking manufactures, or is engaged in production of articles or things. The term production has a larger magnitude and is more expansive and liberal than the term manufacture . The terms manufacture and pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns to make, or fabricate or bring into existence an article or a product either by physical labour or by power. The word manufacture in ordinary parlance would mean a person who makes, fabricates or brings into existence a product or an article by physical labour or power. The other shade of meaning which is the narrower meaning implies transforming raw materials into a commercial commodity or a finished product which has an entity by itself, but this does not necessarily mean that the materials with which the commodity is so manufactured must lose their identity. Thus both the words manufacture and produce apply as well to the bringing into existence of something which is different from its components. One manufactures or produces an article which is necessarily different from its components. 13. The difference in the words manufacture , production (to produce) and process was examined by the Supreme Court in Commissioner of Income Tax, Kerala v. Tara Agencies, (2007) 6 SCC 429. On the question of what is meant by the term production , it has been elucidated and explained as under:- 16. In Black's Law Dictionary (5th Edn.), the term production has been de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (2010) 320 ITR 665, the thermo mechanical process that converts partially oriented yarn into textured yarn, which is a new and a distinct product or article was regarded as manufacture as it brings about a structural change in the yarn itself. Partially oriented yarn cannot be used in warp or weft but texturized yarn can be used. It was held that the structure, the character, the use and the name of the product are indicia, which are to be taken into account while deciding the question whether the process amounts to manufacture or not. We have referred to the said decision, as the chemical composition of the partially oriented yarn and the textured yarn is similar, but the use, name and character of the yarn becomes different after texturizing. 16. In the present case, manufacture as well as production of goods, articles or things is covered under Section 10A/10B. The activity for converting gold bricks, biscuit or bars, into jewellery amounts to production or manufacture of a new article. The gold, silver or platinum in bar, biscuit or brick form, is converted by manual labour and by the use of implements/tools or by machinery, culminating into an entirely new article/thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations provided by the overseas buyers to the assessee. Contention of the assessee that to be a manufacturer or processor, they need not carry on manufacturing or processing activities by employing own labour or workers was specifically raised, but not accepted. It was observed that that the assessee had swapped the gold and had procured gold jewellery from reputed manufacturers, without giving further details. The assessee, as observed by C.I.T (A), had paid fixed rate as making charges. Thus, the C.I.T (A) held that the assessee was not a manufacturer of jewellery and had also not processed gold to make jewellery/ornaments, hence was trading in jewellery. 11. The factual finding recorded by the Tribunal on the said aspect is to the contrary and reads: 6. We have carefully considered the facts of the case and the rival submissions made before us. It is noticed that there is basic difference between those of the subject case and those for the assessment year 1996-97. In the year before us, the position was that exports were affected of jewellery and ornaments were being manufactured for gold obtained from MMTC was handed over to the job workers with designs and directions wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost of manufacturing separately. In some instances gold was supplied to the petitioner by the consumer themselves and the petitioner after getting it made into ornaments with the help of artisans charged the consumer for the cost of manufacture plus some margin of profit themselves. The sales tax officer refused to grant the exemption on the ground that the petitioner was not a manufacturer but was merely a supplier. In that situation their Lordships of the Orissa High Court ruled out that the expression manufacture accruing in the exemption clause meant the first owner of the supplied finished product for whom it was made either by his paid employees or even by independent artisans on receipt of raw materials and labour charges from him. The ratio of the cited case applies squarely to the facts of the appellant. The other two sales tax cases relied upon on behalf of the appellant similarly confirm manufacture even if carried out through third party assistance. In the other decision reported in CIT vs. Talwar Khullar Pvt. Ltd., Supra states that where there is conversion of the raw material through a process into a commercial article manufacture follows. In view of the pluralities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... processing activities, when these activities were undertaken by a third person, under the control and supervision of the assessee. In the present case we are not examining and deciding whether the respondent-assessee was an industrial undertaking, but a narrower and specific question, of distinction between a manufacturer and trader, arises for consideration. A manufacturer of jewellery or ornaments might not require huge investment in machinery etc. Mode and manner of engaging and undertaking manufacturing activity could be variable. Aforesaid decisions are relevant as they differentiate between a trader and a manufacturer/processor, on the principle of control and supervision, when the manufacturing activity is undertaken. The same test has been applied by the Tribunal. 13. In view of the findings recorded above, it has to be held that sub-clause (a) to sub-section (3) to Section 80 HHC of the Act, would be applicable in view of the factual finding recorded by the Tribunal that the aforesaid work was undertaken by the job workers under the supervision and control of the assessee and under their directions/check. 14. The substantial question of law is accordingly answered ..... X X X X Extracts X X X X X X X X Extracts X X X X
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